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Oil prices climbed in March, April

Sam Fletcher
OGJ Senior Writer

After trading at lower levels for 4 months, benchmark oil prices climbed above $50/bbl in late March and early April, exceeding $52/bbl in light trading Apr. 9 ahead of commodity markets closing for the Good Friday holiday in New York and London.

For 4 weeks through Apr. 9, the May crude contract finished each week on the New York Mercantile Exchange at virtually the same price as the previous week, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Oil prices, however, fell below $50/bbl in early trading Apr. 13 amid negative economical indicators after the Paris-based International Energy Agency again reduced its 2009 estimate of world demand for oil. Based on its reassessment of world gross domestic product and lower-than-expected first quarter demand data, IEA lowered its outlook by 1 million b/d to 83.4 million b/d—the lowest level in 5 years and 2.4 million b/d below the 2008 level.

"The pace of contraction is close to early 1980s levels, with a growing consensus that economic and oil demand recovery will be deferred to 2010," said IEA officials. It was the eighth consecutive month IEA reduced its original forecast of 2009 demand.

Oil supplies decline
IEA reported global oil supplies fell 400,000 b/d to 83.4 million b/d in March. Oil produced by the Organization of Petroleum Exporting Countries declined by 235,0000 b/d from February to 27.8 million b/d in March. Among OPEC members other than Iraq, production was up 720,000 b/d above their 24.9 million b/d target quota.

"Supplies stand at 5-year lows amid exceptionally weak demand, with [OPEC] ministers meeting again May 28. Effective spare capacity is around 5.5 million b/d. The call on OPEC crude and stock change is 28.2 million b/d for 2009, 2.6 million b/d below 2008 levels," said IEA.

Non-OPEC supplies fell 170,000 b/d, with a 220,000 b/d dip among members of the Organization for Economic Cooperation and Development partly offset by higher non-OECD output. IEA reduced its 2009 estimate of non-OPEC supplies by 320,000 b/d, largely due to lower biofuels production output, and weaker first quarter crude production in Asia. "Non-OPEC output now falls from 50.6 million b/d in 2008 to 50.3 million b/d in 2009," IEA said.

In Houston, analysts at Raymond James & Associates Inc. noted, "The agency also said that February 2009 oil inventories in developed nations grew to the highest levels recorded since 1993. The IEA revision occurred despite Chinese data showing increasing crude oil imports and industrial output growth. Preliminary trade data revealed that China imported 16.3 million [tonnes] of crude oil in March, up 33% from 11.7 million [tonnes] in February, as industrial output growth grew to 8.3% in March after a record low of 3.8% in the first 2 months of 2009."

OECD industry stocks increased 7.5 million bbl in February to 2.74 billion bbl, 7.2% above year-ago levels. Lower North American products only partially offset a rise in Pacific crude stocks. An upward revision to January inventories, plus increasing February stocks and weaker forward demand, pushed stock cover to 61.6 days by the end of February stock cover to 61.6 days, 7.9 days above a year ago.

IEA expects lower global crude runs to persist through into the third quarter. "Demand revisions, weak middle distillate cracks and reports of bulging product inventories in several markets, suggest a further painful period of weak margins as refiners adjust operating rates to the 2.8% decline in demand now expected for this year," officials said.

Coal-to-gas switching
Meanwhile, Raymond James analysts reported, "Over the past 6 months, natural gas and coal prices have plummeted, dropping 50% and 60%, respectively." Under current conditions, they said, the market price that most likely would encourage customers to switch from coal to gas is "near $3.25/Mcf." They added, "This is just a theoretical guess given that the actual price band using the full range of gas and coal plant efficiencies could be as low as $2/Mcf and as high as $4/Mcf."

The analysts said, "Despite the persistent talk of coal-to-gas switching, it is difficult to find evidence to support such claims on a massive scale." They anticipate an average 500 MMcfd of coal-to-gas switching in the period of Nov. 1-Oct. 31. "At most, we wouldn't expect more than 1.5 bcfd of coal-to-gas fuel switching to actually occur, and that would only last for a few months in the spring. The bottom line is that coal-to-gas fuel switching would not appear to be the savior of the summer gas market, nor the death knell for the coal markets," said Raymond James officials.

(Online Apr. 13, 2009; author's e-mail: samf@ogjonline.com)


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