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MARKET WATCH: Inventory growth put oil price at 16-month low

Sam Fletcher
Senior Writer

HOUSTON, Oct. 23 -- Energy prices continued to tumble Oct. 22 with the new front-month contract hitting a 16-month low for benchmark US crudes in the New York market following a bearish government report of rising inventories of oil and gasoline.

The Energy Information Administration said commercial US crude inventories climbed by 3.2 million bbl to 311.4 million bbl during the week ended Oct. 17, surpassing the Wall Street consensus for a build of 2.3 million bbl. Gasoline stocks gained 2.7 million bbl to 196.5 million bbl in the same period but remained below average for this time of year. Distillate fuel inventories jumped by 2.2 million bbl to 124.3 million bbl, outstripping the consensus for a 100,000 bbl build. Propane and propylene inventories dipped 100,000 bbl to 61.1 million bbl that same week (OGJ Online, Oct. 22, 2008).

"Demand is rebounding from recent lows, but with the stock builds, the days of cover in product remain in the range of previous years and in that regard show neither a great deficit nor a great surplus," said Olivier Jakob at Petromatrix, Zug, Switzerland. "Some of the rebound in demand is probably linked to industrial output resuming along the US Gulf Coast in the aftermath of the storms as propane and propylene demand is up 600,000 b/d from 3 weeks ago." Meanwhile, the US Minerals Management Service reported 500,000 b/d of Gulf of Mexico crude production was still offline as of Oct. 22.

Jakob noted heating oil stocks in Petroleum Administration for Defense District 1 (PADD 1) in the US Northeast are 9 million bbl, or 24%, below its year-ago level. "And the Northeast is currently getting the first taste of the approach of winter," he said.

The recent free-fall in equity markets and the plunge of the euro vs. the dollar also contributed to the sell-off of commodities Oct. 22. The Dow Jones Industrial Average posted one of its biggest point drops ever, now down nearly 40% from its record highs a year ago. Both the euro and the British pound were down against the dollar in currency trading, although the yen hit multimonth highs as US equity stocks fell. "Energy stocks underperformed the broader market again," said analysts in the Houston office of Raymond James & Associates Inc.

"The continued surge of the dollar made for continued deleveraging of global commodity exposure," said Jakob. "The price of crude oil might be close to the levels seen at the start of 2007, but the [Dow Jones-American International Group Inc.] Commodity Index is now at the lowest level since the end of 2003. Five years of commodity super cycle has been erased in 4 months."

Moreover, Jakob said, "Volatility in dollars per barrel is the same now as when we were at $145/bbl, and this translates into accelerating losses for the passive investor who judges the performance of his portfolio in percentage returns rather than in dollars a barrel or cents per bushel."

OPEC outlook
Despite near-term volatility, Raymond James analysts said the Organization of Petroleum Exporting Countries should be able to keep crude prices at $80-100/bbl until fading non-OPEC supply eventually tightens the market.

At their planned Oct. 24 meeting in Vienna, OPEC ministers will be "facing the dilemma that the market belief of what [amount of crude production] should be cut is far larger than what market balance projections currently imply needs to be cut," said Paul Horsnell, Barclays Capital Inc., London. Like many analysts, he expects the oil market to tighten in 2009 with reduced OPEC output and weaker-than-expected non-OPEC supply more than counterbalancing demand changes.

Jakob said, "The current situation of economic slowdown and credit freeze is quite unique as together with low oil prices it will translate in an additional supply challenge in a year or two from now as some supply projects will be pushed further back." For now, he said, "Technically we remain in a negative trending momentum, but the direction will be set by the OPEC decision and until then prices will gyrate according to the latest elevator sound bite coming out of Vienna."

OPEC Pres. Chakib Khelil said the group probably will cut production to dry up excess global supply and observed that a price of $90/bbl would not prevent economic growth.

The average price for OPEC's basket of 13 reference crudes dropped $3.53 to $60.82/bbl on Oct. 22.

"Khelil estimates global demand will rise by 700,000 b/d in 2009. In our 2009 oil outlook…we reiterated our expectations that demand will decline going into 2009. Our base case sets a starting point for 2009 at 85.71 million b/d (800,000 b/d below the International Energy Agency's 2008 estimates), followed by 0.5% demand growth in 2010 and 1% demand growth in 2011 before recovery thereafter," said a analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va.

Meanwhile, after meeting with Russian President Dmitri Medvedev to discuss global oil markets, OPEC Sec. Gen. Abdalla Salem al-Badri said he will not ask Russia to cut production (OGJ Online, Oct. 22, 2008). Russia's Deputy Prime Minister Igor Sechin said oil is now "more of a financial instrument than a commodity." Instead of reducing production, he said, Russia might develop spare production capacity to influence prices.

Energy prices
The December contract for benchmark US sweet, light crudes fell $5.43 to $66.75/bbl Oct. 22 on the New York Mercantile Exchange—the lowest closing for a front-month crude contract since June 13, 2007. The January contract dropped $5.48 to $67.16/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.93 to $65.96/bbl. Heating oil for November lost 14.06¢ to $2.04/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) dropped 12.1¢ to $1.57/gal.

Natural gas for the same month declined by 6.7¢ to $6.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 15.5¢ to $6.96/MMbtu. EIA reported the injection of 70 bcf of natural gas into US underground storage in the week ended Oct. 17. That brought the amount of working gas in storage to 3.3 tcf, down 77 bcf from year-ago level but 93 bcf above the 5-year average.

In London, the December IPE contract for North Sea Brent crude lost $5.20 to $64.52/bbl. The November gas oil contract fell $25.50 to $663/tonne.

Contact Sam Fletcher at samf@ogjonline.com.


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