Higher Jet Fuel View Bolsters Southwest Air, JetBlue

Merrill Lynch raised the underlying oil price assumption for its industry jet fuel forecast for 2005 to $45 per barrel of West Texas Intermediate from $40. Merrill cut earnings forecasts on nine out of the 18 carriers it covers, and now sees the industry's pretax 2005 loss at $3.4 billion, compared with its earlier view for a pretax loss of $1 billion. The research firm said, 'High oil prices will accelerate an industry restructuring that is long overdue. Some carriers will be forced to retrench further and some may even go out of business.' Merrill said 'financially formidable' low-cost carriers such as 'buy'-rated Southwest Airlines (nyse: LUV - news - people ) and JetBlue Airways (nasdaq: JBLU - news - people ) 'are best positioned to capitalize on the potential opportunities that arise from the industry disruption.' Although the firm doesn't rate any major network carriers higher than 'neutral,' Merrill said AMR (nyse: AMR - news - people ), Continental Airlines (nyse: CAL - news - people ) and Northwest Airlines (nasdaq: NWAC - news - people ) 'are best positioned to 'weather' the industry storm.' "

Have US petroleum prices peaked this year?

A look at inventories suggests that while crude may have reached its 2004 high, the products have hardly been handed over to the bears. The front - month New York Mercantile Crude Exchange contract had been on a bull run all year, driven by violence in the Middle-East, low crude inventories, growing Chinese demand, and steamy gasoline prices. However, after peaking at an all time high of $42.38/bbl on Jun 1, prices have retraced. Front-month crude oil settled 68 cts lower at $37.57/bbl Jun 23 on the New York Mercantile Exchange.

On Jun 17, OPEC increased its demand forecast for its crude in the second half of 2004 by 580,000 b/d, but insisted it had spare production capacity to cover any disruptions this winter. That the world is better supplied with crude can be seen not only in the lower benchmark prices, but in softer spot crude differentials, especially in Europe in West Africa. The spot crude trans-Atlantic arbitrage to the US has been closed for several weeks. In order for the arbitrage to reopen, US prices must rise, or foreign prices soften (or a combination of both).

The EIA was only slightly less concerned about gasoline stocks, which have fallen during the past two weeks. While the declines were relatively mild - 800,000 bbl for the week ended June 18, for example - the agency noted even that is beyond the norm.

"In a month when gasoline inventories are usually fairly stable, any decline, especially considering their already low levels, is worrisome," it said, noting stocks continue to linger below the lower end of the average range. "Without significant volumes of gasoline available in inventories, the system will find it difficult to quickly respond to any surges in demand or reductions in supply related to infrastructure problems."

2005 Power Industry Forecast Outlines Healthy Capital and MRO Spending Outlook for North America

Despite the decline in new generating unit development spending, the power industry is expected to remain healthy and is expected to continue to lead other industrial segments in investment dollars spent in 2005. Over half of the project activity originally projected to kick off during 2004 was either cancelled, or delayed until later years. Early 2004 projections had the industry exceeding $91 billion, but by the beginning of the fourth quarter power industry capital spending was adjusted to just over $21 billion. In contrast, major maintenance spending remained steady with $2 billion completed or underway by the end of the year.

The outlook for 2005 seems to be a mirror image of 2004. Currently, over 600 capital projects valued at $95 billion have been identified to potentially kick off this year. Industrialinfo.com estimates that as much as 78% of the total value of these projects will drop out as a result of cancellations and delays. The year should end with approximately $20.9 billion in total capital spending for 2005.

Maintenance spending is expected to remain healthy with 436 projects valued at over $1.8 billion expected to kick off this year. Overall the North American Power Industry is expected to have a healthy year for capital and maintenance spending as new generation, environmental compliance, plant upgrades and modernization and renewable fuels projects lead the way.

NYMEX crude settles $1.33 lower in conjunction with heating oil

February crude futures on the New York Mercantile Exchange settled $1.33/bbl lower at $42.12/bbl Monday in conjunction with a sharp sell-off in the heating oil contract. Abnormally warm temperatures at the start of peak demand season has alleviated concerns about insufficient supply. "Refiners can be very happy with the volume of distillates they have been able to sell over the past few months at very strong prices, but consumers have to be feeling some remorse at having put so many eggs into the bullish basket," Tim Evans, energy analyst at IFR Energy Services, said in a report. "Weather forecasters didn't help either, with their frequent warnings of colder-than-normal temperatures that have been largely off the mark so far this winter." February heating oil settled 6.04 cts lower at $1.1922/gal, the lowest settlement since Sep 10.

February unleaded gasoline settled 12 points lower at $1.1317, benefitting from inter-market spreading as the gas-to-heat spread narrowed by 9 cts.