MARKET WATCH: Crude closes above $75/bbl for first time this year

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 15 -- The front-month crude contract closed above $75/bbl Oct. 14 in the New York market for the first time since exactly a year earlier as the US dollar hit a 14-month low against the euro and optimism for an economic recovery continued to build.

In Houston, analysts at Raymond James & Associates Inc. were ready to celebrate as the Dow Jones Industrial Average passed the 10,000 level for the first time since early October 2008, the latest indicator of a more robust economy.

“Natural gas prices, on the other hand, have fallen 45¢[/MMbtu] in the last 2 days and were down over 3% yesterday,” they noted. “With oil up and gas down, energy stocks were relatively in line with the broader market as the S&P Oil & Gas Exploration & Production Select Industry Index rose 1.4% and the Oil Service Index rose 2.3%.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, however, “To be convinced that we are not in the middle of a dollar bubble and that genuine recovery is behind the rise of the stock market and genuine oil demand behind the rise of the oil markets, we would want to see both of them continuing their advance under a stable dollar. For now we have nothing but a falling dollar and because of that we have to remain extremely cautious about the current dynamics in equities and energy.”

US inventories
The Energy Information Administration reported Oct. 15 commercial US crude inventories grew by 400,000 bbl to 337.8 million bbl in the week ended Oct. 9, well below the 1 million bbl build expected by Wall Street analysts and counter to the American Petroleum Institute’s earlier report of a 2.7 million bbl draw. EIA said US gasoline stocks dropped 5.2 million bbl to 209.2 million bbl in the same week; the Wall Street consensus was for a 1.1 million bbl increase. Distillate fuel inventories declined 1.1 million bbl to 170.7 million bbl, surpassing expectations of a 100,000 bbl dip.

US Imports of crude were down 367,000 b/d to 8.7 million b/d in the same period. The input of crude into US refineries fell by 510,000 b/d to 14.1 million b/d with units operating at 80.9% of capacity. Gasoline production decreased to 8.5 million b/d, and distillate fuel production declined to 3.9 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Refined product inventories (gasoline plus distillate plus jet fuel) fell 6.7 million bbl (1.6%) last week due to a sharp drop in production, which declined 8% week-over-week.”

He added, “EIA regional data showed sharp drops in refinery utilization rates in all the regions except the Gulf Coast (the East Coast, West Coast, and Midwest were all below 80% last week). We expect refiners to maintain lower production levels in the coming weeks in an effort to reduce the large inventory overhang, especially for distillate, where stocks are 54% above the 5-year average for this calendar week in the Gulf Coast.” He expects weak earnings to continue for US refiners into 2010.

EIA also reported the injection of 58 bcf of natural gas into US underground storage in the week ended Oct.9. That boosted the total working gas in storage above 3.7 tcf, approaching total capacity of 3.9 tcf with 3 weeks left in the gas injection season. Storage is now 450 bcf higher than last year at this time and 474 bcf above the 5-year average.

“While the next few injections may appear bullish, we are experiencing a record cold mid-October and, with storage almost full, continue to face storage constraints,” said Raymond James analysts.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “New increased production guidance from both Chesapeake Energy Corp. and Range Resources Corp. provided some confirmation that E&Ps are not curtailing production as was previously thought.”

They also noted, “The rig count is showing a faster recovery than expected, and some are speculating that this could lead to more natural gas supply than is needed in 2010. We are calling for an increase in price towards the end of winter and a $6.50[/MMbtu] average 2010 price—much less bullish than recent forecasts we have heard.”

Meanwhile, the United States Natural Gas Fund has started to roll its New York futures market position from the November gas contract to the December contract, so November contract prices may remain weak until its expiration on Oct. 28. “The sheer size of the UNG fund is a problem for the natural gas market, and at some point regulators will address it,” said Pritchard Capital Partners.

Energy prices
The November contract for benchmark US light, sweet crudes climbed $1.03 to close at $75.18/bbl Oct. 14 on the New York Mercantile Exchange. The December contract increased 89¢ to $75.60/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.03 to $75.18/bbl. Heating oil for November delivery advanced 1.93¢ to $1.94/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month gained 2.57¢ to $1.86/gal.

The November natural gas contract natural gas contract dropped 15.2¢ to $4.44/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 19.5¢ to $3.81/MMbtu.

In London, the November IPE contract for North Sea Brent crude was up 70¢ to $73.10/bbl. Gas oil for November gained $8.75 to $605.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes rose $1.02 to $71.96/bbl Oct. 14.

Contact Sam Fletcher at samf@ogjonline.com.

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