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Tight April crude prices

Sam Fletcher
OGJ Senior Writer

For 5 consecutive weeks through Apr. 17, the front-month contract for benchmark US light, sweet crudes finished each week "almost unchanged" from the close of the previous week within a narrow price range above $50/bbl, said Olivier Jakob at Petromatrix, Zug, Switzerland.

During the first months of 2009, crude prices increased 12%, trading in a tight range of $48-54/bbl through most of April, with the soon-to-expire May contract for benchmark US light, sweet crudes closing at $50.33/bbl Apr. 17, while the June contract finished at $52.47/bbl on the New York Mercantile Exchange. Jakob said, "Stronger equities are providing support to crude oil, but the commodity is starting to feel fatigued, pivoting around $50/bbl without any momentum."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts reported Apr. 20, "We remain confident that, although the US oil demand picture remains disappointing, as long as there is no significant deterioration [in demand] and the Organization of Petroleum Exporting Countries maintains production discipline oil prices will move gently upwards." They expect prices possibly to average $55/bbl in the second quarter, $60/bbl in the third quarter and $65/bbl in the last quarter of this year."

Meanwhile, they noted, "Once again [North Sea] Brent is lording it over WTI with a $3/bbl premium that has been gradually increasing for just over a week," said KBC analysts.

In mid-April, however, the Energy Information Administration reported imports of crude into the US inched up 59,000 b/d to 9.4 million b/d in the week ended Apr. 10. Input of crude into US refineries dropped 300,000 b/d to 14 million b/d, however, with units operating at 80.4% of capacity.

Although OPEC has curbed production, Jakob said, "The main US market is receiving more crude oil, not less, than last year." On the 4-week average through Apr. 10, crude imports into the US Gulf Coast were 500,000 b/d higher than a year ago, "despite the fact that OPEC production is supposed to have been 3.2 million b/d lower than a year ago in the first quarter," he said.

As of Apr. 10, commercial crude in storage on the US Gulf Coast was within 7 million bbl of a record high. With oil arriving steadily, refiners will need to push barrels up the pipeline to Cushing, Okla., to make room for more imports, Jakob said.

Pritchard Capital Partners analysts said, "Markets continue to ignore bearish fundamentals and appear to be taking cues from other factors like inflation fears, the weak dollar, or stock market strength."

The oil market was supported in mid-April by an improvement in the US jobless rate, "indicating the pace of economic decline may be slowing," Pritchard Capital Partners said.

Repsol YPF said Apr. 15 it temporarily was shutting down its 100,000 b/d refinery in Cartagena, Spain, due to poor demand and margins. Jakob noted, "The US has been relying on Europe as an export pool and will probably need to shut more refinery units to clear the Atlantic Basin product overhang; that will in turn weigh on crude oil."

Natural gas outlook
Dissipating demand for natural gas indicates a strong injection season in an already oversupplied market, possibly reaching record levels by the end of summer, said analysts in the Houston office of Raymond James & Associates Inc. in early April.

In New Orleans, analysts at Pritchard Capital Partners LLC expect lower-priced natural gas to take market share from coal in the power generation sector over the next 2 quarters as refining and chemical sector demand "begins a gradual upturn."

However, they said, "The strong dollar (14% above a year ago) will likely lure incremental LNG imports in the spring and summer with imports rising from 1 bcfd to 1.7 bcfd by July. This will offset declining Canadian imports. Even adjusting for as much as 2 bcfd of switching from coal to gas in the power generation sector, industry will need to shut in as much as 1 bcfd" by Oct. 1.

Pritchard Capital Partners expect the rapidly falling North American rig count "will lead to balanced market in 2010 with net deliverability to decline 3 bcfd by yearend (assuming an average 900 rigs [drilling for gas] this year)." They said, "With gas unlikely to see pricing much above $3/Mcf before October at most points, we believe activity levels could be more severe than expected given marginal industry drilling economics. Costs have fallen far more quickly than was discussed on fourth-quarter conference calls. We believe costs are down nearly 20% since fourth quarter."

(Online Apr. 20, 2009; author's e-mail: samf@ogjonline.com)


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