MARKET WATCH: Falling crude oil price remains above $80/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 25 -- The May crude contract lost almost 2% on Mar. 24, at one point dropping below $80/bbl after a bearish government report on US inventories. It later climbed back above that level but still finished down for the day on the New York market.

“Crude inventories rose by more than 7 million bbl, recording its highest build in over a year, but was offset by a larger-than-expected draw for both gasoline and distillate fuels,” said analysts in the Houston office of Raymond James & Associates Inc. “After the dip, oil prices immediately rebounded from the day's low to a high of $81/bbl until finally closing down.” The front-month natural gas contract was down 1%.

Raymond James analysts said, “Energy stocks seemed to shrug off the bearish news and managed to finish higher on the day with the Oil Service Index up nearly 0.5% but underperformed the broader market with the Dow Jones Industrial Average up 1%.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Since mid-December, crude oil has been much less correlated to the dollar than last year; under the 2009 correlation West Texas Intermediate would be at $59/bbl. With the breakdown of the correlation, the weights on the budgets to service the internal subsidies in emerging countries are increasing, and we will not assume a straight continuation of the oil demand recovery in emerging economies under the current combination of oil and dollar prices.”

The natural gas price slipped 1% in the Mar. 24 trading session. On Mar. 25, the Energy Information Administration reported the injection of 11 bcf of natural gas into US underground storage in the week ended Mar. 19, above the consensus estimate of a 9 bcf injection. It was the first injection into gas storage in 2010 and may signal a 2-week early end of the winter withdrawal season.

The injection increased the amount of working gas in storage to 1.6 tcf, down 28 bcf from year-ago levels but 121 bcf above the 5-year average. As a result, Raymond James analysts said, “We may see gas trade below $4/Mcf for the first time in more than 6 months.”

They noted, “While colder weather depleted the year-over-year storage surplus earlier this year, the market has been on a loosening trend lately.”

Oil inventories
Earlier EIA said commercial US crude inventories shot up 7.3 million bbl to 351.3 million bbl in the week ended Mar. 19. Gasoline stocks fell 2.7 million bbl to 224.6 million bbl in the same period; distillate fuel inventories dropped 2.4 million bbl to 145.7 million (OGJ Online, Mar. 24, 2010).

The American Petroleum Institute reported a 7.5 million bbl jump in US crude inventories to 351.5 million bbl, with gasoline down 87,000 bbl to 226 million bbl and distillates falling 2.5 million bbl to 148.6 million bbl.

Jakob said the EIA report is in line with the API on crude oil, confirmed the draw in distillates—“i.e. the API draw was not about statistical convergence”—and showed a significantly higher draw in gasoline stocks. “The extent of the gasoline draw was a surprise, but that did not help the gasoline crack, which continued to drift lower as the focus turned to the BP [PLC’s 384,750 b/d Whiting, Ind.,] refinery that apparently decided to cancel its fluidized catalytic cracking maintenance and push it back to September. With the return of other units, our opinion remains that driving season is already priced in the gasoline crack and that it offers little upside potential from current levels,” he said.

The build in crude inventories has been primarily on the US Gulf Coast “where they are following the same building phase as a year ago,” Jakob said. “The crude oil contango is, however, much lower than a year ago and the WTI 3-2-1 refinery margin higher by about $1.80/bbl. This should translate into a greater incentive to transform the stocks of crude oil into petroleum products and limit the upside potential of the product cracks.”

Overall, Jakob said, “The US petroleum supply system is well balanced with no alarm bells ringing given ample stocks and ample refining spare capacity. The US petroleum fundamentals are as comfortable as a year ago. Open interest in oil futures is, however, much greater than a year ago, and the net length of large speculators in crude and products combined four times higher than a year ago. A lot of expectations are being built into the price of oil, but at one stage the expectations will need to be met by facts.”

In January, European demand for oil recorded its “greatest ever year-over-year fall” after months of “extremely weak” demand indications, said analysts at Barclays Capital Research, a division of Barclays Bank PLC, London, in a weekly data report. “Demand should improve relative to January, but consensus forecasts are still far too optimistic, in our view,” they said.

In sharp contrast, Chinese oil demand began 2010 with growth far above all projections. Barclays Capital Research analysts said, “We place Chinese oil demand growth at 1.4 million b/d for both January and February, and some indications place it even higher.”

Barclays Capital Research expects US oil demand to grow in 2010. First quarter demand data show some growth in gasoline demand and a “much improved” relative performance for distillate demand, analysts said. The weekly data release shows a further build in the crude inventory overhang and a further reduction in the oil products overhang.

Energy prices
The May contract for benchmark US sweet, light crudes traded at $79.88-81.58/bbl on Mar. 24 before closing at $80.61/bbl, down $1.30 for the day on the New York Mercantile Exchange. The June contract dropped $1.24 to $81.01/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.20 to $80.36/bbl, trying to get in equilibrium with the new front-month futures contract. Heating oil for April delivery declined 3.11¢ to $2.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 4.16¢ to $2.22/gal.

The April contract for natural gas was down 2.5¢ to $4.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5.5¢ to $4.05/MMbtu.

In London, the May IPE contract for North Sea Brent decreased $1.08 to $79.62/bbl. Gas oil for April dropped $9.50 to $660.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 64¢ to $76.90/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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