MARKET WATCH: Crude price slips below $50/bbl

April 29, 2009
Energy prices continued to fall but at a slower rate Apr. 28 as traders assessed threats to economic growth and a global financial recovery.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 29 -- Energy prices continued to fall but at a slower rate Apr. 28 as traders assessed threats to economic growth and a global financial recovery.

The price of the front-month crude contact rose from the session's lows in the New York market after the April US consumer confidence number jumped to 39.2, up from an expected 29.7 and the highest level since November, said analysts at Pritchard Capital Partners LLC, New Orleans. Crude prices pushed above $50/bbl in early trading Apr. 29.

"With a weaker dollar, the overall commodity complex was mixed and not showing the same flu-scare selling pressure witnessed [Apr. 27]," said Olivier Jakob at Petromatrix, Zug, Switzerland.

However, the World Health Organization warned the disease is not containable and raised its worldwide pandemic alert to the highest point in the 4 years the warning system has existed. A 2-year-old boy who recently traveled to the US from Mexico died Apr. 29 in Houston, the first US fatality attributed to swine flu. In the US, about 60 cases of the flu have been reported, prompting some US senators to question whether the US should close its border with Mexico, where the disease is believed to have originated and where the most cases have been reported. The disease is reported to be expanding in Europe.

US inventories
The Energy Information Administration said Apr. 29 commercial US crude inventories jumped 4.1 million bbl to 374.7 million bbl in the week ended Apr. 24, outstripping Wall Street's consensus for a 1.8 million bbl build. Gasoline stocks, however, fell 4.7 million bbl to 212.6 million bbl in the same period, reversing expectations of a 200,000 bbl increase. Distillate fuel inventories increased 1.8 million bbl, compared with a consensus for a 1 million bbl rise to 144.1 million bbl.

Imports of crude into the US dipped by 31,000 b/d to 9.8 million b/d last week. Yet the input of crude into US refineries increased 182,000 b/d to 14.3 million b/d, with refineries operating at 82.7% of capacity. Although heading toward the peak summer driving season, gasoline production decreased to 8.8 million b/d while distillate fuel production increased to 4.2 million b/d.

"There is no precise number on the total workable crude storage capacity in the US, but based on historical comparison we should be getting close to it. In the past few weeks, the market has made a repetitive pattern of buying into the higher-than-expected stock builds, hence we need to keep a bias for this to be repeated again, especially since the gasoline draw could be taken as a positive input," said Jakob.

With the resulting drop in international air traffic, Jakob reasoned, "The current swine flu theme should favor gasoline over heating oil, and that spread could see some further support from the weekly draw of gasoline [compared with the] build of distillates."

Natural gas outlook
In a recent report, Simmons & Co. International, Houston, noted the industrial sector historically accounts for 30% of US gas demand, while 30% of US electric power generated is consumed by industry. It said total industrial demand for natural gas including the power generation sector is between 35% and 40% or 22-25 bcfd, based on expected 2009 consumption. However, company analysts said, "In our view, many industrial producers were left with excess inventory in the late winter months [due to] the recession and resulting rapid plunge in demand. Producers idled plants to work off those inventories and are now modestly increasing runtimes at facilities to meet demand."

Simmons & Co. analysts said, "Since 30% of total electricity demand comes from the industrial sector, this portion of electricity demand moves in tandem with gross domestic product growth. While the residential and commercial sectors are far more inelastic than the industrial sector, the magnitude of this economic downturn is evoking a consumer response from those subgroups as well. The EIA estimates negative year-over-year growth for power demand for 2009 (down 1.6%). We are now in a near unprecedented period when electricity consumption is expected to be negative year-over-year for 2 years in a row. Furthermore, the marginal fuel for power generation in most regional US markets is natural gas, so a decrease in power consumption translates directly to lower natural gas demand, as gas-fired plants (vs. lower-cost baseload fuels like coal and nuclear) are left off the supply stack (although coal-to-gas switching should offset some of these declines)."

They expect gas demand by the power generation sector to decline 5%, or 900 MMcfd, in 2009, although coal-to-gas switching could fatten gas demand if natural gas prices continue to decrease relative to Eastern coal. They anticipate increased electricity consumption in 2010 "although we do not expect consumption to match 2008 levels until 2011 on an absolute basis."

Energy prices
The June contract for benchmark US light, sweet crudes lost 22¢ to $49.92/bbl Apr. 28 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., was back in sync with the front-month futures contract, down the same amount to the same price per barrel. The July crude contract lost 43¢ to $51.09/bbl on NYMEX. Heating oil for May decreased 0.62¢ and reformulated blend stock for oxygenate blending (RBOB) for the same month slipped 0.55¢, yet their closing prices were virtually unchanged at respective averages of $1.32 and $1.40/gal.

The expiring May natural gas contract gained 6.8¢ to $3.32/MMbtu while the new front-month June contract advanced 7.8¢ to $3.44/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 6¢ to $3.27/MMbtu. Pritchard Capital Partners said, "US cooling demand will be 25% higher than usual over the next 7 days, as New York is forecast to reach a high of 89° F., 24° above normal." They quoted Devon Energy Corp. Chief Executive Larry Nichols predicting gas prices will stabilize sometime this winter when US gas production drops to a balance of supply and demand.

In London, the June IPE contract for North Sea Brent crude dropped 33¢ to $49.99/bbl. The May gas oil contract lost $1.25 to $419.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes declined 51¢ to $48.70/bbl on Apr. 28.

Contact Sam Fletcher at [email protected].