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."