MARKET WATCH: Rising inventories push down oil prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 23 -- Oil prices continued falling Sept. 22 in the New York futures market as traders shrugged off the weakening dollar and focused instead on a government report of unexpected increases in US inventories of crude, gasoline, and distillate fuel.

“The broader [equity] market fared no better (the Dow Jones Industrial Average fell 0.2% while Standard & Poor's 500 Index gave up 0.5%) after downbeat earnings forecasts for technology companies disappointed investors and a drop in US home prices provided yet another signal that the economic recovery might be faltering,” said analysts in the Houston office of Raymond James & Associates Inc.

Natural gas prices continued to rise, however, on weather forecasts of a strengthening Caribbean storm. Gas prices were still climbing in early trading Sept. 23.

Oil prices were weaker in early trading, however, “with the stronger dollar…dragging front-month West Texas Intermediate back below $74/bbl,” said analysts at Standard New York Securities Inc., part of the Standard Bank Group. “Although the inventory overhang in crude oil and many of its products makes it hard to get too bullish over the short term, its well worth noting that crude oil prices are still well within the range they’ve occupied since mid-2009, with front-month WTI continuing to look very comfortable in the $70-80/bbl range.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “We expect [crude] prices to find support from the weakening dollar, which declined 0.8% on speculations that the Federal Reserve Bank will infuse more cash into the economy.”

US inventories
The Energy Information Administration said commercial US crude inventories increased 1 million bbl to 358.3 million bbl in the week ended Sept. 17. The Wall Street consensus was for a decline of 1.8 million bbl. Gasoline stocks climbed by 1.6 million bbl to 226.1 million bbl, opposite market expectations for a 300,000 bbl decline. Distillate fuel inventories gained 300,000 bbl to 174.9 million bbl, outstripping market expectations of a 100,000 bbl increase (OGJ Online, Sept. 22, 2010).

Crude inventories were expected to decline last week primarily because Enbridge Energy Partners LP’s 670,000 b/d 6A crude pipeline was shut-in Sept. 9 due to a leak. However, the pipeline was repaired and reopened Sept. 17 (OGJ Online, Sept. 20, 2010).

EIA reported Sept. 23 the injection of 73 bcf of natural gas in US underground storage in the week ended Sept. 17, well below the consensus estimate of an 87 bcf input. The latest injection increased working gas in storage to 3.34 tcf. This is down 175 bcf from the comparable week in 2009 but 195 bcf above the 5-year average.

Olivier Jakob at Petromatrix, Zug, Switzerland, complained of “a general myth” on Wall Street the second round of “quantitative easing” of the economy, or QE2, is bullish for oil through the lower dollar index. “Our view is that QE is in reality bearish for oil,” Jakob said. “First, QE is being applied because of a weak economy and it is expected that the Fed will slash its US gross domestic product growth outlook for 2011. Low GDP is not good for oil demand.”

Second, he said, “Interest rates at zero and a contango structure transforms any oil storage tank into a money printing machine (and this is real dollars, not the sort coming from the Fed’s printing machine). This results in extreme high levels of oil stocks, which act as a buffer and prevent oil rallies [from gathering] steam.”

Jakob said, “Third, the contango structure that is created by the high level of stocks kills all the economics of holding length in WTI indices as an asset class. While investors that have bought gold during QE1 have done very well, investors [who] bought into oil during QE1 are in the red as they just threw money out to the contango. If new investors buy oil for QE2 it is likely that those that have bought oil into QE1 will be happy to offload their positions to them as they learned the hard way the workings of the contango. Hence while there can be some hype buying into WTI for QE2, both from a fundamental and from a financial basis QE2 should provide a negative return on investments in WTI indices.”

QE1 was the Fed’s unprecedented purchase of agency debt to prop up the housing market and credit facilities for big banks, Jakob said (OGJ Online, Sept. 20, 2010).

Meanwhile, the Sept. 21 statement from the Federal Open Market Committee, the Fed’s policy-making arm, that it is “prepared to provide additional accommodation if needed” to support the economic recovery is maintaining pressure on the US dollar. “But this only means that we will probably go deeper into the currency and protectionist wars,” Jakob charged. “Congress is expected to vote on a Chinese currency bill next week, and if Japan should not intervene today due to the meeting between Obama and the Japanese prime minister, we will nonetheless be ready for further intervention in days to come if the yen continues to rise. The dollar is also trading below the Swiss franc, and Brazil has been quite ‘voiceful’ over the last few days that it stands also ready to intervene,” he said.

Energy prices
The new front-month November contract for benchmark US light, sweet crudes dropped 26¢ to $74.71/bbl Sept. 22, on the New York Mercantile Exchange. The December contract fell 35¢ to $76.30/bbl. On the US spot market, WTI at Cushing, Okla., was down 66¢ to $72.86/bbl. Heating oil for October delivery declined 1.29¢ to $2.11/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dropped 1.82¢ to $1.90/gal.

The October natural gas contract gained 4.7¢ to $3.97/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2¢ to $4.02/MMbtu.

In London, the November IPE contract for North Sea Brent crude dropped 47¢ to $77.95/bbl. Gas oil for October lost $10.25 to $670/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell 93¢ to $74.41/bbl.

Contact Sam Fletcher at

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