NEW YORK (Dow Jones)--Crude oil prices have dropped 8% from their recent record high near $120 a barrel, but the sell-off may be short-lived as the impact of supply outages combines with rising seasonal demand.
Although the U.S. appetite for oil in the first quarter was the weakest since the fourth quarter of 2003, the latest data show signs of growth in the world's biggest oil consumer ahead of the key summer driving season. In the four weeks covering most of April, U.S. demand for gasoline was up 0.4%, while total oil use was up 0.5%, according to the Energy Information Administration.
While that's far from robust, it's a significant improvement on the steep 2.3%, or 480,000-barrel-a-day fall in first-quarter demand. Early indications - subject to revisions which have roiled prices in recent months - suggest April demand was stronger than expected.
The EIA estimated in its April 8 Short-Term Energy Outlook that oil demand in the month would average 20.42 million barrels a day, down 0.8% from a year ago, and gasoline demand would trail the year-earlier level by 0.4%. The apparent uptick in demand came in the face of the highest-ever monthly average crude oil futures price of $112.46 a barrel, up 75.6% from a year ago.
The average price was about 8% above the $104-a-barrel level the EIA had projected for the month. What's more, retail gasoline prices averaged $3.458 a gallon in April, up 21.5% from a year ago, the EIA said.
The AAA Daily Fuel Gauge Report said Thursday that regular gasoline already sells for a nationwide average of $3.623 a gallon, a level it expects on a monthly basis in June. Retail diesel fuel, at $4.25 a gallon Thursday, stands far above the EIA's projected peak for the year of $3.91 a gallon in April. Prices in the month averaged $4.084 a gallon, up 44% from a year ago.
Nigeria Oil Vital To U.S.
Now a seasonal uptick in demand, diminished flows of key light, sweet crude from Nigeria, and expected ramping up in U.S. refinery runs, may send prices rising again. "Summer driving season is approaching," said Jan Stuart, economist at UBS Securities in New York. "Even in a recessionary economy, seasonal gasoline demand will pick up, which adds to stress on the global oil supply chain."
Civil unrest and workers' strikes added to the stress in a market already facing slower-than-expected supply growth in oil exporters and surging demand from developing countries, led by China.
Worries over a workers strike at a 200,000-barrel-a-day refinery in Scotland combined with output losses in Nigeria to propel oil prices up to $119.90 - a record high - on April 22.
Output of Nigeria's highly prized light, sweet crude oil was slashed by more than half of its 2.5 million-barrel-a-day capacity late last month due to sabotage attacks on facilities and workers' strikes. Some output still remains off-line, despite workers settling a dispute with Exxon Mobil Corp. (XOM) at a crucial time for the U.S. oil market.
Nigeria accounts for more than 10% of U.S. crude oil imports and has ranked as the fourth-biggest supplier of foreign crude in recent months, EIA data show. "Nigeria produces extremely high-quality oil, of which supplies were scarce already," said UBS' Stuart.
"These outages mitigate against the price-depressing impact of softer demand fundamentals in the shoulder season. "Unless oil prices come down in a hurry, they won't come down for a while," he said.
Crude oil input to U.S. refineries averaged 14.54 million barrels a day in the four weeks ended April 25, EIA data show. That's down 3.2% from a year ago, and 2% below the level the EIA expects for all of April. But the EIA expects runs in May will jump to average 15.38 million barrels a day, in line with year-ago levels.
Refinery Runs To Rise
Stuart said a rising trend of refinery runs after seasonal maintenance turnarounds should be emerging soon, with May kicking off gains in North America, followed by Europe, the Mideast and Asia by July. U.S. crude stocks, at near 320 million barrels on April 25, are at their lowest level since Oct. 12, and are in the low end of the five-year average range for this time of year.
Stocks are sufficient to cover 21.7 days of current refinery demand, down from 22.2 days a year ago, but above the 21-day average of the past five-years, EIA data show. Gasoline stocks, after dropping by 10.5% in the past seven weeks, are 6.8% above a year ago and at the upper-end of their five-year range. Stocks are sufficient to cover 23 days of demand, two days more than a year ago, and slightly above the five-year average of 22.4 days, EIA data show.
The Federal Reserve on Wednesday cut its key rate by a quarter point to 2%, the seventh cut in months, and it signaled it may be ready for a pause. A sell-off in oil prices, spurred by bearish inventory data, accelerated on the news. But new concerns about the resumption of Nigerian oil flows pulled prices well off the lows.
On Thursday, crude prices fell to an intraday low of $110.30 a barrel - marking a 8% drop from the peak price - and a 2.8%, or $3.16-a-barrel, fall on the day. But prices recovered late in the session, ending down just 0.8%, or 94 cents lower, at $112.52 a barrel - the lowest level since April 14.
Tom Bentz, analyst and broker at BNP Paribas in New York, said prices would have to settle decisively below $110 a barrel to fuel further declines. The Fed action, which may strengthen the dollar and thereby limit investor interest in oil futures, did "damage to uptrend (in oil in the) short term," Bentz said.
Still, he said, he only sees a "15%" chance that the recent high of near $120 a barrel marks the top of the thundering rally which has caused prices to more than double in the past three years.
Eric Wittenauer, energy analyst at Wachovia Securities in St. Louis, said he, too, is skeptical about further falls in prices. "We've seen new exuberance on the buy side with every pullback," he said.
-By David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com