MARKET WATCH: Crude continues 3-day price drop to below $75/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 17 -- Crude oil prices continued falling Sept. 16 for the third consecutive session, dropping below $75/bbl in the New York market after Enbridge Energy Partners LP indicated it would reactivate its 670,000 b/d 6A crude pipeline as early as today.

“Prices had found some comfort earlier in a somewhat positive [US] employment report but could not maintain the momentum due to the projected early restart of the line 6A and declined to the pre-leak levels,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. The pipeline was shut-in Sept. 9 due to a leak (OGJ Online, Sept. 16, 2010).

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, “One week later, the Enbridge line 6A is restarting and West Texas Intermediate closed yesterday almost at the [same price] level as [Sept. 10]. WTI has also regained most of the contango that it had lost on the back of the pipeline incident, and its discount to North Sea Brent crude has been rolled from October to November. Now that crude prices have readjusted back to pre-incident levels, we would expect that the focus shifts back for the next 3 days to the exogenous financial markets.”

He said, “Early indications are that there was no stock draw in Cushing, Okla., in the week to Sept. 14, hence overall the impact of the pipeline closure could be even more minimal than expected and should not change the contango picture in WTI. Long positions in WTI currently have an annualized holding cost of 20% on the contango roll and if [US Federal Reserve Chairman Ben S.] Bernanke next week is able to artificially support the markets, we will again use that as an opportunity to establish counter-trend trades as in our opinion the US oil fundamentals remain too weak, the contango cost too great, and the financial correlations are at risk to the disappearing volume on equities.”

Shama said, “Initial jobless claims dropped by 3,000 to 450,000 in the week ended Sept. 11, the lowest level in 2 months while economists were expecting that the claims would increase to 459,000. Although, crude has now lost the premium associated with the pipeline-related supply disruption, we expect storm risk in the Gulf of Mexico to provide some support to prices.”

He said, “A storm developing in the Caribbean early next week may threaten supplies from the gulf.” Early projections have this developing storm possibly heading towards New Orleans by the end of the month.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Gas prices dipped sharply following the Energy Information Administration's report of a 103 bcf injection (above consensus of 92 bcf), but rallied to end the day up 2% on a flurry of short covering following the release of an updated 2-week weather model, which showed the potential of a large hurricane in the gulf.” They reported oil and gas prices along with the Dow Jones Industrial Average were up in early trading Sept. 17.

In the interim, Jakob said, “Hurricane Karl is picking up strength and could be a Category 3 before landfall [on the Mexican mainland], but it has passed already most of the oil producing assets.” It likely will delay exports of Mexican crude oil “for a few days” but should not have any major impact on oil production.

Sharma noted, “Producers are increasingly realizing that if the low price environment continues, they would have to pull back their natural gas drilling activity and even consider doing the ‘unfathomable’—letting go of leases.”

Meanwhile, the euro continued to increase value over the US dollar for the fifth consecutive session.

Oil price outlook
At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “Overall, crude oil is in the middle of the $70-80/bbl range it’s been trading in for the last few months. The market seems stuck and appears to be desperately looking for positive news in terms of oil demand or signs of an improving economic outlook. We still believe better economic data will be seized on and likely have a disproportionate effect on prices, whereas middling to poor data is priced in already.”

He reiterated, “We are increasingly looking towards distillate inventory levels in the US for…direction in crude oil prices as we head towards winter. However, we recognize that financial markets remain an important driver of oil prices in the short-term. Looking at short-term correlations, crude oil is taking direction from US equity markets (and to a lesser extent the dollar) in recent days.”

The equity futures market in the US looks positive at present, said De Wet. “While we expect inflation to remain low in the US, we also believe liquidity will continue to grow,” he said. “While the market structure differs greatly, positive sentiment towards commodities in general may see oil outperform.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “The energy sector remains the worst performing sector since the end of last year. Like 4 years ago, energy returns continue to struggle with a negative roll return. Despite weak physical fundamentals oil prices may find some support from the US mid-term elections, which have typically proved bullish for US equity markets.”

He also noted, “Recent weakness in the US dollar is not providing the same level of consistent support for WTI that was apparent throughout much of 2009.”

Citing the Paris-based International Energy Agency’s September oil market report, Sieminski said, “The oil markets seem to be characterized recently by a supply and demand ‘stalemate’ that includes a ‘healthy supply cushion,’ meaning reduced power for isolated events to drive prices outside of the 2010 trading range near $75/bbl. Other than the potential for a serious geopolitical event to shake up this standoff, we still see the stock market as providing the greatest potential for a shock.”

Oil prices have maintained a strong correlation to the Standard & Poor’s 500 index since March 2009.

Asian gas oil
The surge in Asian gas oil exports to Europe during the first half of this year was “to some extent out of sync with the historical East-West price relationship,” Sieminski reported. “In our view, this reflects the extent of the surplus in Asia chasing arbitrage opportunities.”

He noted, “An armada of gas oil is set to sail from Asia to Europe in the next few weeks, according to trade and media reports. Reuters [news service] estimates 500 million bbl of gas oil is scheduled to load in late September-early October from Japan, South Korea, and Taiwan destined for European ports. While this significant flow of East gas oil to the West in part reflects genuine demand given sustained low refinery runs in Europe in response to poor margin performance, this also reflects the growing surplus in Asia.”

Asian gas oil demand growth rates “have been stellar,” averaging growth of 9.2% so far. However, Sieminski said, “Refinery capacity growth in the region, which has been dominated by China and India, has been equally stellar.”

In Europe, on the other hand, refinery runs in 2009 were 1.1 million b/d below 2008 levels, and runs so far this year are down a further 300,000 b/d. “As a consequence, the massive surpluses in gas oil inventories that was a feature of onshore Organization for Economic Cooperation and Development European balances last year has been tamed to some extent,” said Sieminski. “As of end-June, European gas oil stocks were brought down to 40 days of cover from 46 at the start of this year. In Asia, refinery runs rose 300,000 b/d in 2009, and this year to-date runs are up 1.5 million b/d.”

The growth in Asian gas oil has been driven entirely by the non-OECD, China in particular,” he said. “China’s refinery runs year-to-date are up 1.2 million b/d, or 17% year-over-year. This imbalance in Asian gas oil fundamentals is reflected in the steady rise of gas oil from Asia to Europe. Asian gasoil exports to OECD Europe hit a peak in March, according to IEA data.”

Energy prices
The October contract for benchmark US light, sweet crudes dropped $1.45 to $74.57/bbl Sept. 16 on the New York Mercantile Exchange. The November contract lost $1.38 to $75.74/bbl. On the US spot market, WTI at Cushing was down $1.45 to $74.57/bbl. Heating oil for October delivery declined 3.36¢ to $2.10/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 3.78¢ to $1.92/gal.

The October natural gas contract gained 6.7¢ to $4.06/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., slipped 0.5¢ but closed virtually unchanged at a rounded $4.06/MMbtu.

In London, the new front-month November IPE contract for North Sea Brent lost 94¢ to $78.48/bbl, still at a premium to WTI. Gas oil for October was down 75¢ to $672.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 12¢ to $75.49/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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