MARKET WATCH: Rising oil stocks push down prices

Sam Fletcher
Senior Writer

HOUSTON, Jan. 17 -- Energy prices continued to fall Jan. 16 after the Energy Information Administration reported a bigger-than-expected build in US crude inventories—the first gain in 9 weeks.

"The market is signaling that the demand side of the energy equation is much more important than the supply side, as oil has fallen 10% since reaching $100/bbl earlier this year," said analysts in the Houston office of Raymond James & Associates Inc.

EIA said commercial US crude inventories increased by 4.3 million bbl to 287.1 million bbl during the week ended Jan. 11, surpassing Wall Street expectations of a 500,000 bbl increase. Gasoline stocks gained 2.2 million bbl to 215.3 million bbl the same week, while distillate fuel inventories were up 1.1 million bbl to 129.8 million bbl (OGJ Online, Sept. 16, 2008).

"It does now look as if the long seasonal build in US crude oil inventories has finally started, said Paul Horsnell at Barclays Capital Inc., London. "It normally lasts at least 4 months, and although it is a seasonal pattern, it can often dampen [market] sentiment. The mechanics of the rebound in inventories in the latest data are fairly straightforward, refinery runs moved to a more-normal seasonal level in falling dramatically by 760,000 b/d, while imports rose by 580,000 b/d. That is a combined swing of a huge 1.34 million b/d, but despite that the patterns do not seem particularly abnormal. Runs are now roughly where they should be seasonally, and imports are also pretty much at par." Cushing, Okla., crude inventories "fell from their already low levels, but should still rise seasonally, if erratically, from here without threatening to spearhead any move towards a significant contango," he said.

EIA statistics "has provided a tug-of-war between a lower flat price on the back of a larger than expected build in overall crude stocks and a higher backwardation on the back of an unexpected draw in Cushing. Refinery runs are coming off by a substantial amount as poor refinery margins are providing an incentive to start the maintenance work early," said Olivier Jakob of Petromatrix GMBH, Zug, Switzerland.

He said, "The supportive strength of the US market in 2007 has not come from strong demand but from capacity constraints and especially from refineries having great difficulties restarting from their maintenance schedule. As we enter the US refinery maintenance cycle, crude oil stocks should start their seasonal rebuilding, but products will be exposed to the refinery restart risk."

OPEC outlook
The market also apparently was influenced by President George W. Bush's visit this week to Saudi Arabia where he urged King Abdullah bin Abdulaziz al-Saud to increase oil production to ease energy prices.

However, Horsnell said, "A ramping up of pressure on the Organization of Petroleum Exporting Countries from external leaders often tends not to facilitate decision making." OPEC members are scheduled to meet Feb. 1. "Were the meeting to be held tomorrow, we would say that odds of an increase would be absolutely zero," said Horsnell. "In short, the change in the information available to ministers since their last meeting Dec. 5 would not seem to justify an increase. In other words, if they could not sanction an increase before, it will be harder to sanction an increase this time."

Jakob said, "As soon as West Texas Intermediate broke through $90/bbl, OPEC delegates from the smaller countries started one after the other the quote machine of 'no increase is necessary.' For now, OPEC is playing the 'maybe we do' (at $100/bbl), 'maybe we don't' (at $90/bbl) game."

Horsnell said, "Oil demand is far more sensitive to emerging market growth. Indeed, the three largest sources of oil demand growth in 2007 were China, India, and Saudi Arabia, and we expect those three countries to be the three largest sources of oil demand growth in 2008 as well. However, US demand pessimism tends to rule the roost in the short term, and it is that which is weighing on prices."

Energy prices
The February crude contract of benchmark US light, sweet crudes dropped $1.06 to $90.84/bbl Jan. 16 on the New York Mercantile Exchange. The March contract lost $1.37 to $90.36/bbl. On the US spot market, West Texas Intermediate at Cushing was down $1.06 to $90.85/bbl. The February heating oil contract dropped 2.88¢ to $2.52/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.09¢ to $2.28/gal.

The February natural gas contract dropped 6.3¢ to $8.13/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 3¢ to $8.22/MMbtu. Meanwhile, EIA reported the withdrawal of 59 bcf of natural gas from US underground storage in the week ended Jan. 11. That was at the high end of the Wall Street consensus and compared with withdrawals of 171 bcf the prior week and 89 bcf during the same period last year. US gas storage is now 2.7 tcf, down by 258 bcf from a year ago, but 168 bcf above the 5-year average.

In London, the February IPE contract for North Sea Brent fell $1.23 to $89.75/bbl. Gas oil for February dropped $18 to $780.50/tonne.

The average price of OPEC's basket of 12 benchmark crudes fell $2.07 to $86.42/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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