MARKET WATCH: Crude futures rally in final hour

Sam Fletcher
Senior Writer

HOUSTON, Jan. 23 -- A bearish government report on US inventories of crude and products pushed prices lower before optimism that President Barack Obama will boost the economy triggered a rally during the last hour of trading Jan. 22 on the New York market.

Reports of higher-than-expected jobless claims and record-low December housing starts also undercut energy prices in early trading, said analysts at Pritchard Capital Partners LLC, New Orleans.

The Energy Information Administration under the Department of Energy said commercial US crude inventories shot up 6.1 million bbl to 332.7 million bbl in the week ended Jan. 16. Gasoline stocks escalated by 6.5 million bbl to 220 million bbl in the same period, while distillate fuel inventories increased by 800,000 bbl to 145 million bbl (OGJ Online, Jan. 22, 2009).

Most of the crude inventory increase was in Petroleum Administration for Defense District 3 (PADD 3) along the US Gulf Coast. That build was "the result of lower refinery runs while imports were kept steady," said Olivier Jakob at Petromatrix, Zug, Switzerland. What was "more surprising," Jakob said, is gasoline production in PADD 3 increased 70,000 b/d although crude runs were down by 380,000 b/d, triggering a plunge in the gasoline track.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Refined product inventories (gasoline plus distillate plus jet fuel) increased 7.7 million bbl (1.9%) last week, which was above expectations, due primarily to weak demand and higher imports. Distillate inventories are now 9% above the 5-year average for this calendar week, and we expect this higher supply to place downward pressure on margins, a negative for the refining stocks."

EIA regional inventory data "showed large rises to East Coast, Midwest, and Gulf Coast gasoline inventories. Additionally, we estimate that refinery utilization rates dropped in every region except the Midwest vs. [the previous] week. We expect refiners to continue to reduce supply in order to better match weak demand," Rousseau said.

Meanwhile, the Federal Highway Administration reported US vehicle miles driven were down 5.3% in November from a year ago. Other sources estimate production by the Organization of Petroleum Exporting Countries is down 1.55 million b/d this month from December levels. That "would imply a compliance level of about 70% and is about 3 million b/d lower than the September reference base," said Jakob.

Any hope that crude prices would be less volatile in 2009 has proven to be just "wishful thinking," said analysts in the Houston office of Raymond James & Associates Inc. after crude prices bounced between $40.41-45.10/bbl before closing above $43/bbl in New York. Crude prices fell more than 8% following the EIA report but rebounded as the White House urged quick action on the economic stimulus package before the US House.

"Oil prices have been resilient lately despite building inventories and weakening demand, but there's a good chance oil will soon test new lows," Raymond James analysts warned. "In the natural gas markets our super bearish gas call may prove conservative, as gas prices have remained weak even with the colder winter weather. Today could be another day in the red for energy stocks as both commodities and broader market futures are down premarket."

Jakob said: "Technically, West Texas Intermediate refuses to trend. The $40/bbl support held despite much worse than expected DOE statistics, but the short covering was not strong enough to test the resistance of the 50-day moving average (of $45-45.50/bbl). Gasoline was situated at a key resistance line at $1.20/gal but the DOE build pushed it back down instead to the lower band of the 2009 range. The rebound in WTI was also helped by some short covering in the equity markets, which are hesitating between fear of the economy and fear that the Obama administration brings already a weekend surprise package."

In London, Paul Horsnell at Barclays Capital Inc. said the "relative weakness" in demand among member nations of the Organization for Economic Cooperation and Development has shifted towards Europe and diesel, and away from North America and gasoline.

"In absolute terms, there was no relative improvement at all in OECD oil demand from September to November," he said. "However, there have been some sharp changes in the sources of demand weakness both by region and by oil product. In broad terms, the weakness has become more centered on Europe and less centered on North America. In terms of the demand barrel, the weakness has become more centered on diesel and less centered on gasoline."

Horsnell said, "The effect of the downturn may have hit Europe later than the US, but when it hit, it hit hard. European oil demand went from a year-over-year increase of 28,000 b/d in September to a decline of 86,000 b/d in November, a relative movement to the downside of 1.14 million b/d. Much of that sharp reversal was due to falling diesel demand. In September, European diesel was higher year-over-year by 400,000 b/d, but by November it was lower year-over-year by 220,000 b/d."

Energy prices
The March contract for benchmark US light, sweet crudes increased 12¢ to $43.67/bbl Jan. 22 on the New York Mercantile Exchange. The April contract gained 28¢ to $45.83/bbl. On the US spot market, WTI at Cushing, Okla., inched up 2¢ to $42.27/bbl. Heating oil for February lost 3.74¢ to $1.35/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) declined 8.04¢ to $1.09/gal.

Natural gas for the same month dropped 9.9¢ to $4.68/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18.5¢ to $4.71/MMbtu.

In London, the March IPE contract for North Sea Brent crude gained 37¢ to $45.39/bbl. The February gas oil contract dropped $8.50 to $420.75/tonne.

The average price for OPEC's basket of 12 reference crudes increased 77¢ to $40.31/bbl on Jan. 22.

Contact Sam Fletcher at samf@ogjonline.com.

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