MARKET WATCH: Crude oil price rebounds above $72/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 26 -- Crude oil prices rose Aug. 25, with the front-month crude contract up 1.2% to once again top $72/bbl, ending a 5-session losing streak in the New York market.

However, natural gas prices fell 4.2% “as forecasts for a mild winter continued to pour in while the formation of Tropical Storm Earl in the Atlantic is unlikely to plow into the gas-producing Gulf of Mexico,” said analysts in the Houston office of Raymond James & Associates Inc.

Analysts at Standard New York Securities Inc., part of the Standard Bank Group Ltd., reported crude prices “benefited” from bargain-hunting and the weaker dollar. “However, prices are likely to pull back on mounting evidence of a stalling global economic recovery,” they said.

Oil prices rose as traders shrugged off a bullish report on US inventories of crude and petroleum products. The Energy Information Administration said commercial US benchmark crude inventories jumped by 4.1 million bbl to 358.3 million bbl in the week ended Aug. 20—“the third straight rise as we exit a relatively nonexistent driving season,” Raymond James analysts said. Gasoline stocks escalated 2.3 million bbl to 225.6 million bbl. Distillate fuel inventories climbed 1.8 million bbl to 225.6 million bbl (OGJ Online Aug. 25, 2010).

EIA subsequently reported the injection of 40 bcf of natural gas into US underground storage in that same week, slightly above the Wall Street consensus for 39 bcf. That increased working gas in storage to 3.05 tcf, down 198 bcf during the same period last year but 177 bcf above the 5-year average.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, credited the oil price increase to the dollar's 0.3% decline against the euro “on deteriorating home sales and weakening economic outlook, domestically.” Crude was “somewhat oversold,” he said. “However, prices would again come under pressure if a respite from the bad economic data comes soon.”

The gas price plunged “as terrible home sales and durable goods data signaled that industrial demand is most likely to weaken for the remainder of the year,” said Sharma. “After existing home sales declined 27% last month, new home sales too fell 12% to an annual rate of 276,000, the weakest since data was first recorded in 1963. Even more alarming was the slowdown in capital spending, which has been a bulwark for the economic recovery so far. Orders for durable goods increased by only 0.3% vs. a consensus of a 3% increase. Excluding transportation, durable goods orders actually declined by 3.8% vs. consensus of a 0.5% increase.”

Sharma said, “Although the strength of an economic recovery is clearly faltering, we believe that natural gas is currently somewhat oversold [and] think that the independent power producers and utilities would take advantage of the current price levels and drive cash demand higher after the September contract is settled.”

EIA data on crude and petroleum products continue to show “a US oil fundamental picture that is going from bad to worse,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Total US petroleum stocks had a massive build of 8.9 million bbl during the week, bringing the total stocks to a new record high. Since the end of March, the US has built very close to 100 million bbl. Unlike the 3 previous weeks, this time around most of the build (8.2 million bbl) was in the visible stocks (crude plus clean petroleum products), which are now over 800 million bbl, and 132 million bbl over the levels of 2008 (but as well 50 million bbl over the levels of last year).”

Moreover, he said, “The end of the gasoline season is about 10 days away, but stocks of gasoline continue to increase and with weekly imports of gasoline at the highest level (1.4 million b/d) since October 2008, we have to be concerned that the gasoline stock builds are not over yet.”

The picture is not much better in distillates where stocks also continue to build, especially in high-sulfur heating oil. “Stocks of distillates are getting close to an all-time high (only in 1982 were they higher) and combined stocks of distillates and gasoline are at a new multiyear high,” Jakob said. “We are getting closer and closer to the maximum utilization of storage tanks in the US, and if US refinery runs have come off during the week they have not fallen enough to prevent the continuation of the overall stock build.”

Jakob said, “The US is filled-up to the rim on product stocks and will have to sharply reduce the level of refinery utilization, which should then result in additional stocks of crude oil, especially with the current level of contango in West Texas Intermediate. The US stock levels are so high that it is difficult to price any risk premiums. At current stock levels, any supply disruption from a hurricane will not be difficult to manage. Hurricane Danielle continues to move north into the Atlantic; tropical storm Earl is likely to be upgraded to Hurricane status but is expected as well to stay in the Atlantic; [and] the disturbance that was under observation yesterday in the US Gulf of Mexico has disappeared.”

Analysts at NUS Consulting Group, Park Ridge, NJ, earlier reported, “In recent months, waning government stimulus programs and decisions taken by numerous governments to rein in ballooning budget deficits appear to have sapped the global economic recovery. It seems clear that government stimulus and aggressive monetary policy have provided substantial support to the global economy; however, in our view the private sector does not seem to be in a position to entirely fill the void left by the expiration of government support programs and the recent trend among governments to reduce their overall deficits.”

Energy prices
The October contract for benchmark US light, sweet crudes gained 89¢ to $72.52/bbl on the New York Mercantile Exchange. The November contract advanced 88¢ to $73.24/bbl. On the US spot market, WTI at Cushing, Okla., was up 66¢ to $71.87/bbl. Heating oil for September delivery rose 3.49¢ to $1.97/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.45¢ to $1.86/gal.

The September natural gas contract fell 16.8¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 10.5¢ to $3.95/MMbtu.

In London, the October IPE contract for North Sea Brent crude gained $1.10 to $73.48/bbl. Gas oil for September was up $3.25 to $620.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 31¢ to $70/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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