Oil futures top $80/bbl

Sam Fletcher
OGJ Senior Writer

After failing to sustain pushes above $80/bbl in four previous sessions, April crude closed at $80.87/bbl Mar. 3, up $1.19 for the day in the highest closing for a front-month contract in 7 weeks in the New York market as the euro strengthened against the US dollar. The contract held above $80/bbl as energy prices fell Mar. 4, then climbed $1.29 to $81.50/bbl Mar. 5 as crude and petroleum products wiped out those losses.

“The oil price was driven up by improved investor confidence in global equity markets, in large part due to Greece revealing further plans to slash its public debt and an oversubscribed bond auction,” said analysts at the Centre of Global Energy Studies (CGES), London. “There are added signs that the US economy is improving—US personal consumption figures rose 0.5% in January, unemployment is falling, and middle distillate stocks, a key barometer of trade activity, are in decline.”

Still, CGES and other analysts said they see little evidence of substantial improvement in oil market fundamentals. “Tanker data from mid-February onwards suggest that Asian lifters could be trimming their crude imports, for instance,” CGES analysts said. “Refiners in the Organization for Economic Cooperation and Development are entering a maintenance period and though this ought to push oil product margins up, it could also limit crude demand and cause inventories to grow once again.”

Last year CGES was of the view “that until middle distillate stock cover fell it would be difficult to believe the US was providing any real support for rising oil prices,” analysts said. “However, it seems that at the very end of 2009 this long-awaited decline actually began. While this was due initially to the exceptionally cold weather, and now may be in large part the result of refineries entering their maintenance period, thus producing fewer oil products, it must also be because of increased economic activity. This would provide some support for prices, though not…above $80/bbl. The next few months, with the arrival of seasonally warmer weather, will provide more of an insight into whether this improvement is fleeting or the beginning of something more lasting.”

Any oil price over $80/bbl “is not sustainable for long, especially when seen through the prism of existing long-term sovereign debt concerns,” CGES analysts said. Other analysts share that skepticism. Olivier Jakob at Swiss-based Petromatrix said, “The oil commodities are not only starting to enter the price zone where consumer demand will be tested, but the rest of the energy complex has also not risen in sync; hence there should be some increased substitution competition working against oil molecules.”

The Chilean effect
The 8.8-magnitude earthquake that rocked Chile Feb. 27 shut down the country’s 100,000 b/d Aconcagua and 114,000 b/d Bio Bio refineries. As a result, 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].”

Chile would displace crude cargoes to the US and would get in return some distillate cargoes, Jakob said at the time. “Given that the US refinery system is still operating below normal capacity, this displacement should not translate in 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,” Jakob said. “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.”

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.

(Online Mar. 8, 2010; author’s e-mail: samf@ogjonline.com)

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