Oil Eyes Record Territory Again, May Prove Hard To Find

NEW YORK, Mar 31, 2006 (Dow Jones Commodities News via Comtex)

Oil prices are having a last hurrah for the quarter before starting what many think will be a seasonal decline.

After spending much of the last two months see-sawing, futures prices on the New York Mercantile Exchange climbed to a two-month high of more than $67.00 a barrel this week, coming within striking distance of the late January high of $69.20 a barrel and the all-time peak of $70.85 a barrel hit last August after Hurricane Katrina slammed into the U.S. Gulf Coast.

The latest increase has been fed by worries about supplies in major producers such as Nigeria, Iraq and Iran. The rally across other commodity markets, not least red-hot precious metals, is also likely rippling into oil, while the Iranian plans to conduct a military exercise on Friday, intended to boost its "defense capabilities," is only apt to push prices higher still.

Legendary oilman T. Boone Pickens told CNBC Thursday that oil could "quite easily" get to $100 a barrel should supplies from such key producers as Nigeria, Iran, Iraq or Venezuela be pulled off the market for an extended period. His view is of course an extreme one but the gains seen thus far this year have all come even before the start of this year's hurricane season.

The May crude futures contract on the New York Mercantile Exchange rose 70 cents to $67.15 a barrel Thursday, the highest level for a front month contract since Feb. 2. April gasoline rose 4.15 cents to $1.9957 a gallon.

By far the biggest reason oil prices rise this time of year is a seasonal climb in gasoline prices. That's because as gasoline prices rise heading into the peak driving summer season, so too do refining margins and demand for crude feedstock.

With gasoline futures rising rapidly against a backdrop of falling inventories, topping $69.00 a barrel may not prove an elusive target, but any gains above that will likely be limited and short lived, barring an unexpectedly bullish development, analysts say.

"I think we will soon test the year high of $69.20 a barrel but we may not take it out by that much," said Phil Flynn, a bullish analyst with Alaron Trading Corp. in Chicago. "Oil seems to be following the same chart pattern as a year ago which means we should have an intermediate peak soon."

Risk Of Fall In Price Increasing

That view is backed up by the difficulty oil prices have had in breaking the $70 threshold, which has assumed almost mythical proportions in the market. What's more, while certainly edging higher on various supply disruptions, the market has shown a tendency to under-react to one-time major market movers, such as the attempted attack in February on Saudi Arabia's massive Abqaiq crude oil facility.

While not downplaying the supply risk premium in the market, analysts say this suggests the current rally stems more from the fallout from gasoline that happens every year.

Last year, crude oil futures peaked in mid-March when they hit a high of $58.28 before selling off into the spring to a low of $46.20 by mid-May. The rise and fall mirrored movements in gasoline futures, which hit an April 4 high of $1.7491 a gallon before selling off in April and hitting a low of $1.3770 a gallon in May.

Walter Zimmerman, a technical strategist with brokerage United Energy in Jersey, N.J., said the downside risk for both crude and gasoline prices grows this time of year.

"You want to be buying crude oil in December, not now," he said. "This is a dangerous place to be a buyer. It may very well go higher, but that may have to wait until the hurricane season" starting June 1. "In the meantime we could have a few months of congestion."

What's more, he added, the normal seasonal decline in prices is likely to be exaggerated this year by concerns over new federal regulations and a planned nationwide phase-out of the additive methyl tertiary butyl ether used to make cleaner-burning gasoline.

The Nymex gasoline contract is based on the MTBE-blended gasoline and while the exchange has made use of MTBE optional in deliveries against its contract, analysts say commercial hedgers are increasingly shying away from the contract.

During the seasonal decline in gasoline last year, "funds were liquidating but (commercial investors) was cushioning the fall," Zimmerman noted. This time around they "won't be there to cushion the fall that may occur during the month of April."

Gasoline A Big Issue

Yet concerns over refiners' ability to phase out MTBE-blended gasoline and make a new grade with ethanol this summer have added to the seasonal upward pressure on gasoline prices this year.

"Gasoline is a big enough issue that can actually move crude prices higher," Novak said. "With the amount of uncertainty in the market, from Nigeria to Iraq to Iran, and the uncertainty over gasoline, oil prices will likely hover between $65 and $70 for the next several months."

Gasoline futures have surged more than 25% over the past month as nationwide commercial inventories of the product have declined nearly 10 million barrels amid an extended seasonal maintenance program, a trend analysts expect to continue for several more weeks.

"We won't have a very strong inventory situation, certainly not enough to keep markets from testing higher," said Mary Novak, an analyst at forecaster Global Insight.

The recent stock draws won't likely be replenished in time for the driving season, she said. The federal Energy Information Administration remains concerned about summer gasoline supply tightness but has said that supply snags could be avoided if refiners ramp up production over the next month.

That could well happen. Meanwhile, with gasoline futures looking strong on the second to last day of their trading for the month, market sentiment has turned decidedly bullish.

Prices "apparently aren't the least bit discouraged from moving higher still," said Mike Fitzpatrick, an analyst at Fimat USA in New York. When "a consensus forms around a preordained conclusions, markets will invariably go there."

Copyright (c) 2006 Dow Jones & Company, Inc.


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Brent Crude Oil : $50.79/BBL 1.30%
Light Crude Oil : $49.96/BBL 1.10%
Natural Gas : $2.77/MMBtu 2.12%
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