Crude makes biggest gain of year

Sam Fletcher
Senior Writer

Crude prices shot up Feb. 19 in the biggest 1-day gain since 2008, carrying petroleum products with it, but energy prices retreated in the next session as markets readjusted to continued low demand.

Benchmark US light, sweet crudes jumped by $4.86 to $39.48/bbl as the Energy Information Administration reported commercial US crude inventories dipped 200,000 bbl to 350.6 million bbl in the week ended Feb. 13. The Wall Street consensus was for an increase of 3.2 million bbl. "For the first time in months, we have seen positive inventory data for crude," said analysts at Pritchard Capital Partners LLC in New Orleans.

"This is the third time crude has tested the $35/bbl price level and bounced. The price action of crude and inventory data imply the [production cuts by the Organization of Petroleum Exporting Countries] are beginning to work" with oil prices at $35-45/bbl, they said.

The March crude contract expired Feb. 20 at $38.94/bbl while the new front-month April contract declined slightly to $40.03/bbl on the New York Mercantile Exchange.

In Houston, analysts with Raymond James & Associates Inc. predicted "a high level of volatility will persist in commodity prices" as economic problems continue to undercut demand, "which has dropped steeper and faster than supply has been removed." They said, "The unstable markets are a result of crude searching for a price where sufficient demand comes off the sidelines and absorbs enough supply to produce a true equilibrium price. Since we are uncertain on the timing of a global recovery that will ultimately translate into a rebounding level of gross domestic product on a worldwide basis, we believe that the existing, steep contango market will perpetuate as the front end of the curve is depressed by a lack of industrialized growth and an unknown amount of excess crude hovering over the market."

OPEC outlook
However, analysts at the Centre for Global Energy Studies (CGES), London, said, "Although global oil demand has fallen rapidly, OPEC supply fell even faster in recent months, removing the over-supply that emerged in the second half of 2008. It is still unclear, though, whether the organization has actually turned lifters away, or simply let its production followƒfalling demand from its customers."

Reduction of Saudi Arabia's crude production is nearing that country's imposed limit to satisfy its need for associated gas. Meanwhile, CGES analysts said, "Several other members have yet to make any significant cuts in their own production. By January, OPEC had implemented some 2.3 million b/d of its agreed 4.2 million b/d cut, with further reductions expected in February and March. Implementing the cuts in full could tighten the market, but any price recovery would likely be short-lived, triggering a further weakening of demand, at least until the global economy begins to pick up again."

CGES said it will be "almost impossible" for OPEC to raise oil prices "anywhere near its desired level of $75/bbl" in this economic climate. "It may be that the best it can do is to cut production in line with demand to prevent further falls in the oil price until the economy begins to recover," CGES analysts said.

Crude inventories at the key Cushing, Okla., delivery point remained flat Feb. 13 while oil stocks along the US Gulf Coast increased by 2.1 million bbl. "Keep in mind that the deliveries to the Strategic Petroleum Reserve will increase during March and should eat into either the US Gulf Coast stocks or the floating storage stocks," said Olivier Jakob at Petromatrix, Zug, Switzerland.

Meanwhile, he said data from various sources indicate that destruction of gasoline demand might be starting to bottom. According to EIA, the 4-week average US demand for gasoline average "is now flat to last year (on the revised basis) and gasoline 'implied demand' is up by 0.8%. The US Highway Administration indicated the amount of miles driven by US motorists during December was down only 1.6%, an improvement over the declines of 4-5% in recent months. The Northeast US was actually up 0.5% from a year ago. "This improvement comes despite the rough weather driving conditions and higher unemployment rate and needs to be taken as a warning flag that price does matter for gasoline demand," Jakob said.

The latest MasterCard [Spending Pulse] report showed gasoline sales at the pump to be up 1% in the 4 weeks to Feb. 13, providing a base case that the decline in US gasoline demand has bottomed, Jakob said.

(Online Feb. 23, 2009; author's e-mail: samf@ogjonline.com)

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