ENERGY MATTERS: Will Oil Inventories Or Iraq Call Tune
DJN: =DJ ENERGY MATTERS: Will Oil Inventories Or Iraq Call Tune?
By David Bird
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Is Iraq's indefinite halt of crude oil exports keeping
prices from plummeting?
Key U.S. data - endorsed by the biggest player on the world oil scene -
suggest the answer is a resounding: Yes.
While oil prices scurry higher Wednesday on news of a dramatic drop in U.S.
crude oil inventories, a closer look at the latest statistics shows a
different picture.
Energy Matters has a hard time reckoning the American Petroleum Institute
data for the week ended June 8, which showed a bullish decline of more than
13 million barrels in U.S. commercial crude stocks.
A tropical storm in the U.S. Gulf disrupted crude imports, but that accounts
for just 5 million barrels of crude that didn't reach inventories. We have
strong doubts that refiners withdrew a further 8 million barrels from
stocks, while trimming refinery operations to 96.4% of capacity from 97.1% a
week ago. We suspect the Energy Information Administration's 8.2 million
barrels drop is more on the mark. Look for more normal API data, if not a
revision, in next week's report.
The number that we're zeroing in on this week is crude oil inventories in
what's known as Padd II, the U.S. region which covers several Midwest
states, including Oklahoma. That's were the tiny town of Cushing (population
7,200) and self-proclaimed Pipeline Crossroads Of the World is located.
Cushing is the delivery point for crude oil under the Nymex light, sweet
crude oil contract.
No less of a market force than Ali Naimi, oil minister of Saudi Arabia, the
world's largest oil producer and exporter, says the level of crude stocks in
the Midwest's Padd II is a "good indicator" of where prices are headed.
When Midwest crude stocks drop to "around 60 million barrels," Naimi told
reporters after the Organization of Petroleum Exporting Countries' talks in
Vienna last week, U.S. benchmark West Texas Intermediate crude "really
spikes. When it is around 70 (million) to 72 million barrels, the price
plummets."
Cushing Cushion Suggests Price Drop
So where does the crude oil stocks cushion at Cushing and elsewhere in the
Midwest stand now?
According to Naimi's analysis, prices ought to be plummeting, as EIA figures
show Midwest stocks stood at 70.5 million barrels on June 8, down from just
under 72 million barrels a week earlier, which was the highest level since
early August 1999.
How reliable is the indicator that's been given the Saudi oil minister's
seal of approval?
Let's review.
We've tracked the Midwest's Padd II stocks levels, as measured by EIA,
against the front-month Nymex crude settlement since 1997. Here's what we've
found.
In 1998, weekly Midwest crude stocks averaged a shade over 75 million
barrels, up 8% from just under 70 million barrels a year earlier. The annual
average price dropped in 1998 by 30%, to near $14.50 from nearly $21 in
1997.
In 1999, Midwest stocks fell by an average of near 9% from a year earlier,
to below 69 million barrels and the price surged by 34%.
Last year, crude inventories in the Midwest plunged by 10%, to an annual
average of less than 62 million barrels, and crude prices soared by more
than 56%.
Back in August 1999, when Midwest crude stocks were last this high, they
went into a nosedive over the next 11 weeks, to under 62 million barrels and
the lowest level of the year. As Midwest crude inventories slid by 14%, the
price spiked by nearly 19%.
When Nymex crude hit its post-Gulf War settlement high of $37.20 last Sept.
20, Midwest crude stocks were below 59 million barrels, and when the price
plunged to a low of $10.72 on Dec. 10, 1998, Midwest stocks were above 72
million barrels.
So far this year, Midwest crude stocks are averaging under 64 million
barrels, but that's up 3.4% on the full year average for 2000 and prices are
down 5.3% versus 2000.
The concept of watching such fundamentals as the Midwest's Padd II crude
stocks for market direction get thrown out the window when Iraq President
Saddam Hussein is calling the shots.
Ten days ago, Saddam halted oil exports under the U.N. oil-for-food program
and says he won't resume them until the Security Council drops plans to try
to stiffen the 11-year-old sanctions on his country.
Market fundamentals and Saddam's move put OPEC and the market at a
crossroads. The Midwest's Padd II stocks suggest the market is heading for a
plunge, while a long-term cutoff of Iraq's exports of more than 2 million
b/d could trigger a spike until OPEC convincingly covers the lost barrels.
All eyes focus on July 3, the U.N. deadline for a new sanctions plan, the
expiration of the oil-for-food plan phase and the date of the next emergency
OPEC meeting.
All signs from the U.N. are there is slow-going in reaching an agreement to
tighten sanctions and convince Iraq to restore oil exports under the
oil-for-food plan.
Sour Note Snags Smart Sanctions Plan
In a dumb diplomatic gaffe along the path to so-called "smart sanctions,"
Britain has highlighted why the man in the street in the Arab world is
increasingly siding with Saddam and it will be difficult to get any change
in the sanctions regime.
In what was meant as a tension breaker in tough talks, Britain introduced a
five-minute musical interlude at the start of negotiations, with each
country in turn playing a song representative of their cultural heritage.
Britain, home of the learned Dr. Samuel Johnson, who said among many other
things: "Of all the noises, I think music is the least disagreeable," led
off the song fest with "Wild Wood," a 1980s hit for Paul Weller, better
known for his association with the band Style Council, than with the UN
Security Council.
Dr. Johnson, of course, never had to deal with the U.N.
The music idea hit a sour note with Tunisia, which called it frivolous while
Iraqis were suffering under sanctions, and the plug was pulled.
There's no word on whether Saddam has ever kicked back to "Wild Wood," but
the lyrics may provide some solace and empowerment for the Iraqi leader,
counter to Britain's intent.
"Now there's no justice...There's only yourself that you can trust in,"
Weller sings, in a succinct summation of Saddam's attitude toward the U.N.
sanctions regime.
We see no sign of Iraq restoring exports anytime soon and the oil market is
likely to be dancing to Saddam's tune - not Midwest crude oil fundamentals -
for the near term.
-By David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com
(David Bird is senior energy correspondent for Dow Jones Newswires.)
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(END) DOW JONES NEWS 06-13-01
10:30 AM
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