Sailors sail, crude prevails

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While the shrieks of joy from the waiting family members of the freed British sailors were heard as expected, the other development that was almost taken for granted, of crude taking a $5 a barrel plunge, did not materialise, when Iran gift wrapped up the sailors as an "Easter gift" to the UK.

What made crude spring this surprise on the markets? The answer lay in the reduction in gasoline inventories in the US by five million barrels. Gasoline stocks have fallen to the lower half of the historical range, partly as a result of refinery outages, which help to explain high levels of US unrefined crude, which rose by 4.3 million barrels.

The refineries in the US were operating at 87 per cent capacity, as against a planned utilisation of 90 per cent. Despite the big drop in gasoline supplies, falling gasoline inventories are routine at this time of the year as refineries and wholesalers empty their stocks of winter blends and prepare to take on cleaner-burning summer supplies. This re-tooling of the refineries results in shutdowns, which lead to lower capacity utilisation. 

HURRICANE FORECAST*
	Forecast date
	8-Dec	3-Apr
Named storms	14	17
Hurricanes	7	9
Intense hurricanes	3	5
* By Colorado State University

For years, the typical summer driving season was considered to occur between the Memorial Day and Labour Day holidays, with peak summer gasoline demand occurring sometime after the Fourth-of-July holiday.

While this characterisation still holds, in recent years demand patterns have shifted somewhat to include more robust levels of gasoline demand earlier in the season, with a pre-summer peak in gasoline prices.

As refineries gear up to produce more gasoline by May, we could continue to see such distorted reports with either crude or gasoline inventories being short. Crude can theoretically rise even on high crude inventories as long as gasoline inventories are short, and what can stop crude from rising if crude inventories decline?

Another reason to worry is that on April 3, the Department of Atmospheric Science, Colorado State University, upped its probability of major hurricane landfall. In layman's parlance, the probability of a hurricane with a wind speed of 111 miles an hour or more hitting the US coastline is high.

The department's early forecast of December 8 had a lower probability of that happening. The Department has also raised the number of tropical storms from 14 to 17, the number of hurricanes from seven to nine and intense or major hurricanes from three to five.

Hurricanes are measured on the Saffir-Simpson Hurricane Scale, which has a 1-5 rating based on the hurricane's present intensity. This is used to give an estimate of the potential property damage and flooding expected along the coast from a hurricane landfall. Wind speed is the determining factor in the scale.

When a cyclonic disturbance reaches a wind speed of 39 miles an hour, it is termed a tropical storm and given a name out of the pre-selected list of names. When the named storm graduates to a wind-speed of 74 miles an hour, it is called a hurricane. The hurricane gets to keep the same name.

A Category 1 Hurricane would have wind speeds of 74-95 miles an hour, Cat 2 would be 96-110 miles, Cat 3 is 111-130 miles, Cat 4 is 131-155 miles and Cat 5 has wind speeds in excess of 155 miles. Category 3 or higher hurricanes are called major or intense hurricanes (see table).

With a more active hurricane season being forecast, there is good chance that it will keep the embers hot at the crude counter. And if crude remains buoyant, inflation will continue to sizzle. Though our inflation will not rise till we see an actual rise in the prices of petrol and diesel, it will nevertheless keep the government and the markets on tenterhooks.