MARKET WATCH: Crude oil falls from 2-year high, ending 6-session rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 10 -- The front-month crude contract declined 0.4% from a 2-year high on Nov. 9, ending a 6-session rally in the New York market, “as dollar strength and profit-taking weighed on prices,” said analysts in the Houston office of Raymond James & Associates Inc.

The natural gas contract continued to rise, however, up 3% “as weather reports predicted below-average temperatures for the third week of November,” they said.

Raymond James analysts reported the broader equity market fell a second day with financial stocks leading the decline. However, the SIG Oil Exploration & Production Index was up 3.4% as Chevron Corp.'s acquisition of Atlas Energy Inc. “at a hefty premium boded well for E&P companies,” they said. “Meanwhile, the Oil Service Index underperformed against the broader market, falling 0.9%.”

The International Energy Agency (IEA) released its 2010 World Energy Outlook. “Of particular interest are the long-term price assumptions, with the agency giving a price forecast of $99/bbl in 2020 and $113/bbl in 2035,” said Leon Westgate at Standard New York Securities Inc., the Standard Bank Group.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Either the IEA is very wrong on its price forecast or the market is very wrong in its current pricing of crude…. The IEA sees global oil demand in 2035 at 99 million b/d or 12 million b/d higher than in 2010; that would make an average increase of 500,000 b/d/year.” Jakob claims 2035 “is too far away to make any meaningful forecasts, but a IEA $99/bbl price target in 2020 makes a 13% price increase in 10 years or an average of 1.3%/year and an investment net loss as long as a contango is maintained.

Jakob said US diesel pump sales to road trucks declined in October for the third consecutive month “and is basically at par to the levels of October 2008 but still stronger than a year ago.” The weekly MasterCard Spending Pulse report on retail gasoline sales “shows demand down 111,000 b/d (1.2%) vs. the same week last year and down 182,000 b/d (2%) on the 4-week average,” he said.

Westgate reported, “The latest Chinese customs data show October crude oil imports into China dropped to an 18-month low, after a record high September. Besides the normal month-to-month fluctuations in the import data, it is clear that the Chinese are holding back in October. Part of the reticence may be the market waiting to see what the impact of [the Federal Reserve Bank's second round of quantitative easing] would be. However, with the Yuan continuing to strengthen, consumers may also be holding back from restocking until absolutely necessary.

US inventories
The Energy Information Administration said Nov. 10 commercial US crude inventories fell 3.3 million bbl to 364.9 million bbl in the week ended Nov. 5, surpassing Wall Street’s consensus for a drop of 1.5 million bbl. Nonetheless, crude stocks still remain above average for this time of year. Gasoline inventories were down 1.9 million barrels to 210.3 million bbl in the same period, compared with market expectations of a 1.5 million bbl decline. Both finished gasoline inventories and blending components inventories were down. Distillate fuel inventories dropped 5 million bbl to 159.9 million bbl, far outpacing the 1 million bbl loss anticipated by analysts, but distillates are still above average for this period.

Crude imports into the US were down 489,000 b/d to 8.1 million b/d last week. Over the 4 weeks through Nov. 5, US imports averaged 8.7 million b/d; that’s 90,000 b/d less than in the comparable period a year ago.

The input of crude into US refineries was up 153,000 b/d to 14.1 million b/d in the week ended Nov. 5, with units operating at 82.4% of capacity. Gasoline production increased to 9 million b/d. Distillate fuel production remained virtually unchanged last week at 4.2 million b/d.

Market influence from the latest inventory numbers, Westgate said, “will likely be relatively subdued given the high overall inventory figures. Nevertheless, a more-bullish-than-expected set of figures, particularly in the post QE2 environment, may see crude prices rally, though whether that is enough to see West Texas Intermediate break out of its recent $86-87.50/bbl range remains to be seen.”

EIA also reported the injection of 19 bcf of natural gas into US underground storage during the week ended Nov. 5, far short of the Wall Street consensus for an injection of 23 bcf. That brought working gas in storage to 3.84 tcf; that’s 31 bcf higher than in the same period a year ago and 342 bcf above the 5-year average. The EIA issued that report a day early due to the Veterans Day federal holiday Nov. 11.

Energy prices
The December contract for benchmark US light, sweet crudes traded at $85.48-87.63/bbl before closing at $86.72/bbl, down 34¢ Nov. 9 on the New York Mercantile Exchange. The January contract dropped 36¢ to $87.35/bbl.

On the US spot market, WTI at Cushing, Okla., was down 34¢ to $86.72/bbl. Heating oil for December delivery increased 0.9¢ to $2.41/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.65¢ to $2.19/gal.

The December natural gas contract continued to escalate, up 12.2¢ to $4.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped by 20¢ to $3.77/MMbtu.

In London, the December IPE contract for North Sea Brent crude was down 13¢ to $88.33/bbl, still at a premium to NYMEX. Gas oil for November gained $8.50 to $747/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes rose 30¢ to $84.92/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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