MARKET WATCH: Crude price drops to 2-month low

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 10 -- The front-month crude contract fell Dec. 9 for the sixth consecutive session—the longest losing streak since early July—to the lowest price level since early October on the New York market after the Energy Information Administration reported an unexpected drop in US crude inventories and a bigger than expected build in gasoline stocks.

“Despite trading slightly higher premarket, crude fell 3% yesterday and is down 10% over the past 6 trading days,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude is currently trading with a $2/bbl wide contango to February, and West Texas Intermediate is trading at a $2/bbl discount to Brent.”

EIA reported commercial US inventories of benchmark crude fell 3.8 million bbl to 336.1 million bbl in the week ended Dec. 4. Gasoline stocks increased 2.2 million bbl to 216.3 bbl in the same period, and distillate fuel inventories were up 1.6 million bbl to 167.3 million bbl (OGJ Online, Dec. 9, 2009). The decline in crude inventories was primarily because of a 264,000 b/d decrease in imports to 8.1 million b/d; the Houston ship channel was closed several days by fog. In the 4 weeks through Dec. 4, however, US crude imports averaged 8.5 million b/d, down 1.4 million b/d from the same period in 2008.

Despite an overall drop in US crude inventories, Olivier Jakob at Petromatrix in Zug, Switzerland, noted a 2.5 million bbl increase last week in crude storage at Cushing, Okla., for a total build of 7.8 million bbl in that key location over the last 5 weeks. “As we expect the builds to continue, it should reach this week the peak levels seen in February,” he said. Total Cushing tank shell capacity still allows room for additional oil stock increases. “But we are getting to fill levels where further builds can start to negatively impact the capacity needed for operational requirements. The crude flows from Canada into the Midwest are not slowing down and have actually printed a new historic high on a 4-week average basis,” Jakob said.

On the other hand, there were relatively large draws of 6.7 million bbl last week from Petroleum Administration for Defense District 3 (PADD 3) along the US Gulf Coast (USGC). With more imports delayed by more fog along the Houston Ship Channel this week, "we need to be ready for further low numbers for the USG in the next report,” said Jakob. “The problem with crude draws in the USGC this time of the year is that they tend to be discounted by the market as it is true that sometimes the USGC stocks are kept artificially low onshore for end-of-the-year tax reasons while they are left building offshore and reappear on the balance sheet at the start of the year.”

Jakob added, “Refining capacity might have been reduced in PADD 1 [on the East Coast] with the shutdown of the Sunoco Inc. and Valero Energy Corp. refineries [at Eagle Point, NJ, and Delaware City, Del., respectively], but stocks of clean petroleum products in the region continue to build and are very close to what is probably an historic high.” He said, “In an environment of high stocks and high refining spare capacity we continue to expect that the cycles of crack and processing economics improvements will be shorter than in previous years.”

On the demand side, Jakob said, “There are no great changes. Overall demand on the 4-week average is about 560,000 b/d lower than the credit crisis levels of last year and about 2.1 million b/d lower than the levels of 2007. And this is before any revisions, which have averaged 420,000 b/d [lower] in the third quarter.” US demand for distillates remains poor but may gradually improve as a result of cold weather.

In other news, Raymond James analysts reported a split among representatives of developing countries during the third day of the Copenhagen climate conference. “For perhaps the first time in its history, the tiny Pacific island nation of Tuvalu made waves by tabling its own text, which would require emissions cuts by both rich and poor countries. The ‘Tuvalu draft’ is backed by some smaller Caribbean and African countries but was immediately rejected by China and India, since they categorically refuse to be included in any binding emissions cuts,” they said.

Energy prices
The January contract for benchmark US sweet, light crudes lost $1.95 to $70.67/bbl Dec. 9 on the New York Mercantile Exchange. The February contract dropped $2.07 to $72.55/bbl. On the US spot market, WTI at Cushing was down $1.95 to $70.67/bbl. Heating oil for December delivery dropped 8.16¢ to $1.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 6.73¢ to $1.86/gal.

The January contract for natural gas fell 21.6¢ to $4.90/MMbtu, ending its recent rally on NYMEX. On the spot market, however, gas at Henry Hub, La., continued to climb, up 17¢ to $5.27/MMbtu as cold weather increased demand. The EIA reported the withdrawal of 64 bcf of natural gas from US underground storage in the week ended Dec. 4, putting working gas levels at 3.77 tcf. Gas stocks are 472 bcf higher than a year ago and 513 bcf above the 5-year average

In London, the January IPE contract for North Sea Brent dropped $2.80 to $72.39/bbl. Gas oil for December lost $6.50 to $595.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.10 to $73.70/bbl on Dec. 9.

Contact Sam Fletcher at samf@ogjonline.com.

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