March Oil Prices Marked by OPEC, SPR Wild Cards

NEW YORK (Dow Jones Newswires), Mar. 3, 2009

Oil traders puzzling over the near-term direction of crude prices may be wise to heed the advice given Julius Caesar: Beware the Ides of March.

OPEC's March 15 oil output policy meeting is chief among wild cards that will steer the market.

Saudi Arabia, the world's biggest oil exporter and de facto leader of the Organization of Petroleum Exporting Countries, hasn't tipped its hand ahead of the talks. The Saudis, who already have tightened the taps by some 2 million barrels a day in an attempt to curb the supply glut that continues to cap prices, face a limit over how much more than can cut and for how long. Saudi Arabia relies heavily on natural gas to fuel its petrochemical industry and for electricity generation. Cutbacks in crude output directly impact gas supplies, and as spring approaches, warmer temperatures will spike cooling demand in the desert kingdom.

OPEC has shown strong adherence to pledges made since the autumn to slash production by 4.2 million barrels a day, and further cuts could spark a sustained rally.

So far, OPEC cuts are only starting to dent the huge overhang in global oil inventories and haven't set a firm floor price at $40, widely thought to be group's new minimum.

The global economy has soured even as OPEC has reduced output, with shrinking oil demand, and ballooning stockpiles. With each cut, OPEC creates more idle production capacity, which some analysts said could trickle back into the market at the first sign of recovery in demand or price, effectively capping any rallies.

Weakest Price Since June 2004

Nymex crude oil futures started the month Monday with a 10.3% plunge to $40.15 a barrel, the biggest single-day fall since Jan. 7.

Front-month Nymex crude oil futures in February averaged $39.26 a barrel, down a record 59% from a year ago and the lowest monthly price since June 2004.

February marked the eighth straight month of consecutive declines, the longest streak in Nymex's 25-year crude trading history. Since June 2008, the average price is down 70%, or $95 a barrel.

Average prices had gained in March in eight of the past 10 years, and in each of the last five. But they'll need to overcome a parade of dismal economic data to keep the streak alive.

In the U.S., the world's largest oil consumer, inventories of crude now stand at their highest level relative to refiner demand in February in 15 years, government data show.

Gasoline demand may be showing nascent signs of an improbable recovery amid severe economic weakness, but prices at the pump are down sharply from a year ago.

The relative strength of gasoline to crude oil last month pushed the crack spread - or the profit margin in buying crude and selling gasoline - to nearly $10 a barrel, the highest level since August 2007. The so-called gasoline crack showed a modest profit in January after three straight months of losses.

SPR Moves Will Lift Crude Demand

The relative strength in the crack has some analysts believing that refiners may operate their facilities at higher-than-expected levels in the month, which could chip away at the massive inventory overhang.

Still others believe that continued weak demand may cause refiners to cut operations from 81.4% of capacity utilization in the week ended Feb. 20 to a level in the mid 70% range, which has only occurred in recent years when plants suffered severe hurricane-related outages.

As spring nears, demand gasoline picks up even in the worst economic times. How and when refiners respond will be vital to the course of prices.

If refiners boost crude runs, that could have amplified impact in the market as demand for crude oil will be getting a boost this month from an unlikely source: the U.S. government.

In a policy implemented by the outgoing Bush administration, the Energy Department is shipping some 215,000 barrels a day, by shifting some 6.67 million barrels of oil into the Strategic Petroleum Reserve this month.

The transfer from the open market into the rainy day reserve is the biggest single-month top-up for the SPR since July 1985. The volume isn't huge, considering that refiners have been processing around 14 million barrels of crude a day recently. But it is considerable, as it more than reverses recent week-to-week declines in crude runs.

And when crude goes straight from the market into the SPR, demand for crude rises, without providing the additional fuel that would have come if the oil was refined.

Copyright (c) 2009 Dow Jones & Company, Inc.


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