MARKET WATCH: Crude oil prices rise, reclaim part of previous large loss

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 21 -- In a major turnaround Oct. 20, the front-month crude contract shot up 2.9% in its biggest increase in 5 weeks in the New York market after the US dollar hit a 15-year low against the yen and the Energy Information Administration reported large draws in Cushing, Okla., crude storage and distillate stockpiles.

Only the day before, the same contract plunged 4.3% to below $80/bbl in what was both the largest 1-day dollar amount and percentage decreases since February in that market as China—the world’s biggest oil consumer—raised interest rates to rein in its rapidly growing economy.

“The trading action of the last 2 days highlights the predominance of the dollar trade across asset classes but also the systemic risk that is associated with that trading input. Volatility in the dollar will remain high, and given the strong correlations it remains the trading input,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Natural gas futures price continued to climb, up 0.7% on Oct. 20. EIA reported Oct. 21 the injection of 93 bcf of natural gas into US underground storage in the week ended Oct. 15, exceeding the Wall Street consensus of 88 bcf. The latest input boosted working gas in storage to more than 3.68 tcf; that’s 48 bcf less than the amount of gas in storage during the same period a year ago but 286 bcf above the 5-year average.

EIA earlier reported US crude inventories increased by 700,000 bbl to 361.2 million bbl in the week ended Oct. 15, less than half of the Wall Street consensus for a 1.5 million bbl gain. Gasoline stocks grew 1.2 million bbl to 219.3 million bbl, opposite market expectations for a 1.5 million bbl drop. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories fell 2.2 million bbl to 170.1 million bbl, surpassing Wall Street’s expectations for a 1 million bbl loss (OGJ Online, Oct. 20, 2010).

“Increased speculation for a Fed intervention following Beige Book results that revealed slow [economic] growth as well as higher-than-expected earnings for multiple market leaders provided a boost to the broader market (Standard & Poor's 500 Index and the Dow Jones Industrial Average up 1.1% and 1.2%, respectively),” said analysts in the Houston office of Raymond James & Associates Inc. The Federal Reserve System’s Beige Book is published eight times a year in which each Federal Reserve Bank reports current economic conditions in its district.

In addition to its plunge against the yen, the dollar was down 1.8% against the euro. “The greenback took a dive after the Federal Reserve said that the economy expanded at only a modest pace in September and early October,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Additionally, a lower-than-anticipated increase in the crude inventories also lent support to prices.” The decline in US stocks of distillate fuel was “probably the result of higher diesel imports by France as the ongoing strike-related disruptions have caused fuel shortages in the country,” Sharma said.

However, Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, “Looking past the headline inventory figures and delving deeper into the data, reveals weak crude oil product demand in the US. The 4-week total US product demand fell below 2009’s level for the first time since February.”

The picture differs depending on the crude oil product group. “Based on the latest weekly data, demand of the top three product groups represent 85% of the total product demand. They are gasoline demand at 48.2%, distillate fuel demand at 20.4%, and other oils 16.4%. US gasoline demand fell below last year’s level for the second week in a row. The distillate demand provides a bright spot as it was 9.3% compared to the same period last year. Demand for other oil products had been tracking the rapid descending pattern exhibited in 2008 and 2009,” said De Wet.

He said, “The divergence between the demand for gasoline and that of distillate is supported by a growing economy, as demand for distillate fuel is affected much more by economic activity than demand for gasoline. However, the decline in other oil product demand is a cause for concern. Other oil products include mainly intermediate products (which will be converted into finished oil products like gasoline or distillate fuel) and industrial feedstocks and fuel like naphtha and coke. It could be pointing to a further slowdown in final demand of both fuel and industrial products.”

De Wet reported, “Overall, US oil demand is still subdued, with the demand for distillate fuel the only cause for some optimism. This weak demand makes the market prone to high volatility brought in by the general financial market, as we have seen during the last few days.”

Jakob said, “If the US oil demand picture benefited from a certain base effect gain in the first half of the year, that base effect is starting to erode and US demand on the 4-week average is now slightly below the levels of last year, at par to the depressed levels of 2008 and 2 million bbl lower than in 2007. With US industrial production showing a flattening of the curve and unemployment not improving, it remains difficult to see how US oil demand will show any strong growth into 2011. Excluding October 2008, which was global meltdown month, US oil demand on the 4-week average is at the lowest level for this period of the year since 1998. Given that the Fed will create asset inflation we still expect that QE2 [the latest round of quantitative easing] will be negative US oil demand (price elasticity impact) while at $85/bbl there will not be supply shortfalls from the Organization of Petroleum Exporting Countries.”

Distillate stocks were off by 2 million bbl, “but mainly in diesel while stocks of heating oil were unchanged. Overall stocks of distillates remain at a multi-year high,” he said.

Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, “Refining stocks in our coverage universe have risen by an average of 27% since the start of fall maintenance season (Aug. 26) due to an overall improvement in the market (a 13% gain in the S&P 500 over this period) but primarily because very low U.S. refinery production levels have reduced supply and raised third quarter margins and earnings. However, we expect this supply to return to the market by mid-November as maintenance season ends, and since demand remains lackluster, gasoline and distillate inventories (which are already high) should increase further, placing downward pressure on refining margins. Under this scenario, we would expect refining stocks to decline 10-15% by yearend 2010.”

He said, “Refinery maintenance expectations for October have doubled since prior forecasts in September, as numerous companies have adjusted turnaround schedules. This has resulted in a sharp drop in utilization rates, production levels, and refined product inventories. However, most assets should be fully back on the market by mid-November.”

Rousseau reiterated spare capacity still remains while “another 2-3 million b/d of global refining capacity must be closed before a sustained improvement in refining margins is realized.” He said, “We continue to prefer inland refiners (Frontier and Holly) due to reduced crude oil costs and niche market sales price advantages over their coastal peers.”

He said, “The EIA is currently calling for US consumption of refined products to rise 1.1% in 2010 and 0.6% in 2011, with all major products showing slight increases. However, recent data trends are concerning. For gasoline, both the EIA and MasterCard [Spending Pulse report on retail gasoline sales] stated that demand is down over the past 4 weeks vs. year-ago levels. We would not expect any material improvement in gasoline demand until unemployment declines.”

Energy prices
The November contract for benchmark US sweet, light crudes regained $2.28 to $81.77/bbl Oct. 20 on the New York Mercantile Exchange. The December contract escalated by $2.38 to $82.54/bbl. On the US spot market, WTI at Cushing was up $2.28 to $81.77/bbl. Heating oil for November delivery climbed 6.55¢ to $2.25/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.43¢ to $2.08/gal.

The November natural gas contract continued to advance, up 2.6¢ to $3.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 10.5¢ to $3.50/MMbtu. The price of natural gas increased “as weather projection started to turn favorable,” Sharma said. “The latest weather forecasts suggest that the temperatures would dip below normal by the end of October and early November in the Midwest and the East.”

In London, the December IPE contract for North Sea Brent crude was up $2.50 to $83.60/bbl, still trading at a premium to WTI. Gas oil for November gained $2 to $706/tonne.

The average price for OPEC’s basket of 12 reference crudes lost 54¢ to $78.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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