MARKET WATCH: Surprise gasoline draw lifts energy prices

Sam Fletcher
Senior Writer

HOUSTON, Aug. 14 -- After falling 4 days on the New York market, the front-month crude contract rebounded to $116/bbl Aug. 13 following reports of an unexpected large draw on US gasoline stocks during the week ended Aug. 8.

"Crude got a much needed jolt yesterday following a bullish inventory report, sending prices up 3% on the session," said analysts in the Houston office of Raymond James & Associates Inc. "With the recent decline in crude prices, numerous members of the Organization of Petroleum Exported Countries have been calling for production cuts. While we are not expecting production cuts in the near-term, we continue to believe that if prices fall further, OPEC will step in and defend a price near $100/bbl. Crude's rise helped prop up natural gas on the session, but given the recent volatility (i.e., freefall) in natural gas prices, all eyes will be on today's Energy Information Association storage report."

EIA subsequently reported the injection of 50 bcf of gas into US underground storage in the week ended Aug. 8. That put the amount of working gas in storage at 2.6 tcf, down 330 bcf from a year ago at that same period and just 6 bcf below the 5-year average.

Earlier EIA said gasoline stocks fell 6.4 million bbl to 202.8 million bbl during that same week, vs. a Wall Street consensus of a 1.9 million bbl decline (OGJ Online, Aug. 13, 2008). Distillate fuel inventories decreased 1.7 million bbl to 131.6 million bbl, vs. an expected increase to 1.9 million bbl. Commercial inventories of US crudes dipped by 400,000 bbl to 296.5 million bbl during that period. Analysts were expecting no major change in that stockpile.

Imports of crude into the US dropped by 538,000 b/d to 9.7 million b/d in that same week. The input of crude into US refineries was down 216,000 b/d to 14.8 million b/d with plants operating at 85.9% of capacity. Gasoline production fell to 8.9 million b/d, while distillate fuel production decreased to 4.3 million b/d.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The large gasoline stock draw is a worrying number only if abstraction is made of the falling demand. In terms of days-of-forward demand, products stocks are in line with previous years, and the seasonal patterns as well. Days of cover in crude oil are still lower but improving slightly due to the low refinery runs. Total products demand is 860,000 b/d lower than a year ago (on a 4-week average) and refinery runs are down 868,000 b/d (4-week average) from a year ago. For the corresponding 4 weeks, we have to go back to 1997 to find US refinery run levels as low as today. The difference is that in 1997 refineries were running at 96.6% of operable capacity, compared to 86.8% in 2008. For the corresponding 4 weeks, the percent operable utilization of refining capacity is at the lowest level since the Department of Energy started to collect the data (1991)."

Paul Horsnell, Barclays Capital Inc., London, said, "The strongest US data for quite a while sees the oil product inventory surplus fall sharply, with some better demand indications for the main oil products. Supply-side reactions are continuing to more than counterbalance the impact of softer demand." He said, "The level of Organization for Economic Cooperation and Development commercial inventories is currently lower by a massive 125 million bbl or so than it was 2 years ago. Further, if anything the inventory situation has been tightening recently."

In New Orleans, Pritchard Capital Partners LLC, said Aug. 14, "Building on the roughly $3/bbl gain seen in yesterday's session, front-month WTI futures picked up another dollar in overnight trading, topping out at $117.42/bbl. The contract has since pulled back, however." Prices appeared to have stabilized "in spite of continued supply threats as a result of the ongoing conflict between Georgia and Russia. So, for oil, there's still a threat to the two pipelines that run through Georgia." It was reported BP PLC resumed pumping gas into the South Caucasus pipeline, while the Baku-Supsa line remained shut in. "Like crude, refined products also continued to build on yesterday's gains in overnight trading but have since fallen back to little changed," Pritchard Capital said.

Jakob noted, "There has been so far in the crude oil corrective cycle, 2 strong up days: July 30 and yesterday. On July 30, West Texas Intermediate was approaching a key support area ($122-120/bbl) and bounced back on a larger than expected gasoline draw. On Aug. 13, WTI was approaching a key support area ($112-110/bbl) and bounced back on a larger than expected gasoline draw. The corrective cycle continued after July 30; hence we will not conclude too hastily that a structural bottom is already in."

He said, "We have to respect that some investors will find oil 'cheap' compared to recent historic highs or that commodities are 'cheap' considering that some of the indices have gone back down close to unchanged levels on a year-to-date basis. Yesterday's up day was not only about the gasoline draws but also about strong buying across the commodity boards."

Energy prices
The September contract for benchmark US sweet, light crudes traded at $112.87-117.46/bbl Aug. 13 before closing at $116/bbl, up $2.99 for the day on the New York Mercantile Exchange. The October contract gained $2.86 to $115.99/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.98 to $116/bbl. Heating oil for September delivery increased 5.36¢ to $3.13/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) advanced by 8.91¢ to $2.93/gal.

The September natural gas contract climbed by 12.6¢ to $8.46/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 13.5¢ to $8.06/MMbtu. Pritchard Capital analysts said morning trading below support at $8.20/MMbtu Aug. 13 triggered "an energetic round of buying in September natural gas futures that lasted well into the afternoon." They said, "Some industry experts have observed recently that it appears that natural gas might be the only energy market with its head on straight. Two tropical systems in the Atlantic have caught traders' attention, but paths and landfall predictions are still premature."

In London, the September IPE contract for North Sea Brent crude gained $2.32 to $113.47/bbl. The September gas oil contract was up $7 to $1,019/tonne.

The average price for OPEC's basket of 13 reference crudes advanced 48¢ to $109.56/bbl on Aug. 13.

Contact Sam Fletcher at samf@ogjonline.com.

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