MARKET WATCH: Crude oil closes above $80/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 4 -- Energy prices climbed for the second consecutive day Mar. 3 with crude closing above $80/bbl after failing to sustain that level in four previous sessions in the New York market.

“Oil prices fell into the red for a short period after a bearish Department of Energy report showed the fifth consecutive net build of total petroleum inventories at 4 million bbl; however, oil managed to rally on a weakening dollar, closing above the $80/bbl mark and up 1.5% on the day. Total petroleum storage is now at 765.3 million bbl or 16 million bbl above storage the same time last year,” said analysts in the Houston office of Raymond James & Associates Inc.

The euro strengthened against the US dollar Mar. 3 after the government of Greece announced an austerity program to reduce public debt.

Inventory outlook
DOE’s Energy Information Administration reported commercial US crude inventories jumped by 4.1 million bbl to 341.6 million bbl in the week ended Feb. 26. That far exceeded Wall Street’s consensus for a 1.3 million bbl increase. Gasoline inventories for the same week were up 700,000 bbl to 231.9 million bbl, above the expected increase of 300,000 bbl. Distillate fuel inventories fell 900,000 bbl to 151.8 million bbl; the outlook was for a 1.1 million bbl loss (OGJ Online, Mar. 3, 2010).

The EIA also reported the withdrawal of 116 bcf of natural gas from US underground storage in that same week. That left 1.7 tcf of working gas in storage, down 71 bcf from year-ago levels but 21 bcf above the 5-year average. Raymond James analysts said, “The colder weather experienced through February depleted the year-over-year storage surplus. However, with forecasts continuing to predict cold weather into March, we could continue to see significant withdrawals from storage over the last few weeks of the withdrawal season.”

In other news, China Petroleum & Chemical Corp. (Sinopec), China’s largest producer and supplier of oil and petrochemical products, reportedly is introducing this month a special $19/tonne export subsidy on oil products to help its refineries clear up unwanted stocks of oil products.

“China is of course not the only country facing stock builds,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “In the US, stocks of crude and main clean petroleum products built for yet another week, for a total of 20 million bbl so far this year, to levels that are still 18 million bbl above a year ago (which was a year of exceptionally high stocks) and 68 million bbl above 2008. US stocks of crude and main clean petroleum products are now just 6 million bbl shy of the 2009 peaks. Stocks of gasoline are 16 million bbl above last year while the 4-week average of gasoline demand is at par to the levels of last year, but that is not preventing the gasoline crack gaining $1.70/bbl over the last 2 days, in a rally that would make you think that we are running out of molecules for the driving season.”

He said, “On the positive side, the 4-week average for demand of all products is now higher by 563,000 b/d vs. last year but the increase is in the ‘other products’ while the visible products (gasoline, distillates, and jet fuel) are overall still below the levels of last year. Stocks of ‘other products’ have now been reduced to their seasonal norm and should start soon to build again on normal seasonal pattern as the refinery runs start to increase.”

Jakob observed, “Chile will provide some incremental demand for distillates but at the same time it is ‘force majeure’ on its imports of crude oil, and those displaced cargoes of crude will work their way to the US Gulf [Coast].” The 100,000 b/d Aconcagua refinery and the 114,000 b/d Bio Bio refinery were shut down after an 8.8-magnitude earthquake rocked Chile over the weekend (OGJ Online, Mar. 2, 2010).

“Chile will displace crude cargoes to the US and will get in return some distillate cargoes,” said Jakob. “Given that the US refinery system is still operating below normal capacity, this displacement should not translate into a structural supply issue. Crude oil futures are well supported, but the physical crude has to price itself in the US Gulf at deeper discounts to the futures to find any demand either from refinery processing or for storage.”

He said, “With relatively weak cash differentials on crude oil and the futures product cracks off to the races, we would expect to see some incremental refinery production in the coming weeks. Given that crude oil stocks in the US Gulf have been building 26 million bbl since mid-December and are now 2 million bbl above the levels of last year and 20 million bbl above the levels of 2008, the US Gulf refineries are well prepared to accommodate higher processing rates. On the other hand, if demand for petroleum products does not follow the trend of the Dow Jones [Industrial Average], then the risk is clearly that crude oil stocks will only transform themselves into higher product stocks and induce another cycle of lower refinery margins.”

The contango on West Texas Intermediate “has come off in recent weeks as the crude oil stocks in Cushing[, Okla.] were in drawing mode, but that trend of stock reduction has found a bottom over the last 2 weeks, and crude stocks in Petroleum Administration for Defense District (PADD) 2 outside of Cushing have been gently building for the last 3 weeks. In that context, and given the weak cash differentials, we would be cautious in expecting a much greater tightening of the WTI contango,” said Jakob.

Energy prices
The April contract for benchmark US sweet, light crudes traded as high as $81.23/bbl before finishing at $80.87/bbl Mar. 3, up $1.19 for the day. It was the highest closing for a front-month contract in 7 weeks on the New York Mercantile Exchange. The May contract gained $1.20 to $81.26/bbl. On the US spot market, WTI at Cushing was up $1.19 to $80.87/bbl. Heating oil for April delivery increased by 3.76¢ to $2.09/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated by 5.1¢ to $2.25/gal.

The April natural gas contract gained 4.9¢ to $4.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 1.5¢ to $4.78/MMbtu.

In London, the April IPE contract for North Sea Brent crude advanced $1.07 to $79.25/bbl. Gas oil for March increased $8.50 to $646.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.01 to $76.52/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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