MARKET WATCH: Crude tops $77/bbl in intraday trading

Sam Fletcher
Senior Writer

HOUSTON, Sept. 7 -- The front-month crude contract temporarily jumped above $77/bbl Sept. 6, the highest intraday price level since Aug. 1 in the New York market, as US inventories of oil and gasoline continued to decline.

The Energy Information Administration reported benchmark US crude fell 3.9 million bbl to 329.7 million bbl in the week ended Aug. 31. Gasoline stocks dropped 1.5 million bbl to 191.1 million bbl in the same week, well below average for this time of year. Distillate fuel inventories increased by 2.3 million bbl. to 132.2 million bbl (OGJ Online, Sept. 6, 2007).

"US crude inventories have now fallen below last year's inventory levels for the first time in 12 weeks," said analysts in the Houston office of Raymond James & Associates Inc.

Paul Horsnell at Barclays Capital Inc. in London, said, "US gasoline inventories fell further below the seasonal norm, to a new 2-year low in absolute terms and to a new all-time low in terms of days of forward demand."

However, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, noted a build of crude stocks in Cushing, Okla., storage—"…the first substantial build since April," he said. "More importantly the Cushing build is happening despite the front West Texas Intermediate spreads [being] at a multiyear high backwardation (for the season)."

Moreover, Jakob said oil imports from Canada into Petroleum Administration for Defense District 2 [the US Midwest including Oklahoma] were 190,000 b/d higher in August than in July, resulting in a rebound of stocks. "With refinery maintenance in PADD 2 during September and higher Canadian crude oil production, the flag remains for further stock build in the Midwest, which does not correlate with the current level of WTI backwardation. The Cushing statistics are the first serious alarm bells in many weeks for the WTI backwardation, which will be in greater danger if the Cushing trend is confirmed next week," he said.

Horsnell also noted the consolidation and "recent further firming" of backwardation, with futures contracts each priced lower further out. "The depth of the contango [a reverse situation, with subsequent monthly contracts priced higher further out] 3 months ago would have made it almost impossible to increase output, with the front to second month contango standing at $1.13/bbl and the prompt to 2 years out contango standing at $5.68/bbl," he said. "Now that structure has completely flipped over, with front month WTI trading $1.06 above second month, and the prompt to 2 years out spread now a backwardation of $6.38/bbl. Other things being equal, that scale of switch into backwardation does make it easier to increase output," he said.

OPEC outlook
Raymond James analysts said crude prices were higher in early trading Sept. 7 as traders tried to anticipate what ministers of the Organization of Petroleum Exporting Countries may do at their upcoming Sept. 11 meeting in Vienna. "Several of the oil ministers…have publicly stated they are in favor of not changing current production quotas. However, the [Paris-based] International Energy Agency has been very vocal about OPEC's need to increase production as worldwide crude inventories continue to fall," they said.

The odds on the outcome of the OPEC meeting have shifted several times in the last 3 months. Horsnell said, "Two weeks ago, [OPEC] ministers would have been able to state…that the market was well supplied, prices were in bounds, and then walk away. That appears to be a less comfortable option now" with "prices poised to set new all-time highs." He said, "Unless prices fall back sharply in coming days, ministers may wish to show the market something in terms of volumes, even if it is only the prospect of delayed output increases."

Horsnell reported Sept. 6 that the OPEC basket price had increased for 10 straight days, "gaining a shade under $5 in rising to $71.39/bbl, which is less than $2.50 below its all-time high." He said, "At the time of writing, WTI is above $76/bbl, and complete ministerial inaction would most likely mean not only new all-time highs being set, but highs well into the $80s and perhaps beyond. In other words, to stay put when prices are above $77/bbl, as a minister, one would have to be very sure of some downbeat balances projections, and very worried indeed about the potential for subprime contagion. Overall, it could be considered somewhat extraordinary if price levels were not enough to at least spark an active discussion on the potential roadmap for increasing output."

Meanwhile, there were reports Sept. 6 that Syria fired on Israeli aircraft that allegedly violated Syrian airspace.

Also, meteorologists were still watching for possible storm development a disorganized area of low pressure over the western Atlantic near Bermuda as it drifts to the northwest.

Energy prices
The October contract for benchmark US light, sweet crudes traded as high as $77.43/bbl on Sept. 6 before closing at $76.30/bbl, up 57¢ for the day on the New York Mercantile Exchange. The November contract escalated by 64¢ to $75.31/bbl. On the US spot market, WTI at Cushing was up 57¢ to $76.31/bbl. The October contract for reformulated blendstock for oxygenate blending (RBOB) dropped 2.48¢ to $1.97/gal on NYMEX. However, heating oil for the same month gained 3.69¢ to $2.14/gal.

"The RBOB crack is correcting back to winter values, bringing the gasoline to heating oil premium back to maximum distillate mode and keeping the 3-2-1 refinery margins under pressure," Jakob said.

The October natural gas contract fell 15.5¢ to $5.65/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., shot up 20¢ to $5.95/MMbtu. "The EIA reported a 36 bcf injection pushing natural gas storage levels to over 3 tcf in August, for the first time ever. With the summer weather expected to moderate going forward and the current lack of hurricane activity, look for continued weakness in the natural gas market as we near the end of this injection season," Raymond James analysts said.

Enerfax Daily analysts reported, "A heat wave in the West pushed up demand for electricity from natural gas-fired generators to power air conditioners, yet producers managed to expand storage." They said, "Moving away from the summer heat, there is little to underpin the [gas] market."

In London, the October IPE contract for North Sea Brent crude increased 43¢ to $74.77/bbl. Gas oil for September gained $17 to $668/tonne.

The average price for OPEC's basket of 11 benchmark crudes was up 60¢ to $71.99/bbl on Sept. 6.

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