MARKET WATCH: Crude oil prices rebound; gas futures price declines

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 11 -- The front-month crude contract rebounded strongly Nov. 11 to a near 2-year intraday high above $88/bbl before closing up 1.3%—enough to boost energy stock prices. The natural gas price declined despite a smaller-than-expected injection in US storage but remained above $4/MMbtu.

“After tracking both the dollar and the broader market in recent weeks, crude took its cues from a very bullish Department of Energy petroleum inventories report yesterday, which showed a significant and unexpected draw in crude oil inventories,” said analysts in the Houston office of Raymond James & Associates Inc.

DOE’s Energy Information Administration said 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. Gasoline inventories were down 1.9 million bbl to 210.3 million bbl in the same period, compared with market expectations of a 1.5 million bbl decline. Distillate fuel inventories dropped 5 million bbl to 159.9 million bbl, far outpacing the 1 million bbl loss anticipated by analysts (OGJ Online, Nov. 10, 2010).

“The crude contract for December delivery surged to the highest level since Oct. 8, 2008,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. Distillate consumption last week was at “the highest level since August 2008, signaling a pick-up in the economic activity,” he said.

Leon Westgate at Standard New York Securities Inc., the Standard Bank Group, reported, “The decrease of US oil inventory was mainly due to a further decline in imports. It’s perhaps worth noting that the recent flattening of the contango structure makes the storage and cash-and-carry play increasingly uneconomic. Therefore, the incentive to import more oil, which will end up in storage, is also diminishing.”

Westgate added, “The latest Chinese data show refinery runs continued to pick up in October, as the maintenance season comes to an end. As far as the macroeconomic data is concerned, the October figures for retail sales and fixed asset urban investment were broadly aligned with expectations. However, inflation picked up further…. This could prompt more tightening measures from the government, though with commodities viewed as a hedge by some participants, the impact on commodity prices is not clear cut.”

DOE reported a total stock draw close to 12 million bbl with most of the visible draw in Petroleum Administration for Defense Districts (PADD) 2 in the Midwest and PADD 1 on the East Coast. PADD 3 along the Gulf Coast “had only a marginal stock draw,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

“Given that the draws of the last 5 weeks were from record-high levels, the US is still at multiyear high stock levels for the season and needs to draw another 60-80 million bbl by the end of the year before reaching the stock level that is being priced. The US has to draw stocks in the fourth quarter; otherwise refineries can not run in the first quarter, and while the overhang is being reduced there is still some road to go before the US supply situation could be described as tight,” he said.

Distillates and gasoline stocks have been coming down in PADD 1 and are below the high levels of a year ago but still above the levels of 2007-08. “Imports of gasoline have not been visibly impacted by the French strikes, but US refinery runs on the East Coast have been extremely low at 58.1% capacity utilization,” said Jakob.

However, ConocoPhillips’ 238,000-b/d Bayway refinery in Linden, NJ, is in the restart process following maintenance, as is the 300,000-b/d Irving refinery in St John, NB. “Therefore we expect to see a product supply improvement in coming weeks for the East Coast,” he said.

The 1.3 million bbl draw from crude stocks on the Gulf Coast was “insignificant given that Gulf Coast crude oil stocks are well above the level of previous years for the season,” Jakob said. “Crude oil imports to the Gulf Coast are steady, and overall for the US crude oil imports from Canada, Mexico, and Saudi Arabia have been increasing. Crude oil imports from West Africa have been on a downtrend, but that ties-in with the lower operating rates on the East Coast.”

Natural gas
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 a record 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 lower-than-expected gas injection likely was the result of “incremental fuel-switching induced demand from the utilities…added to the gas home-heating demand,” Sharma said. “About 52% of US households use natural gas for heating.”

He said, “We believe that besides the weather driven increase in gas home-heating demand, utilities too would take advantage of these attractive prices propping up the cash markets.”

Energy prices
The December contract for benchmark US light, sweet crudes hit an intraday high of $88.21/bbl but then retreated to close at $87.81/bbl Nov. 10, up $1.09 for the day on the New York Mercantile Exchange. The January contract gained 94¢ to $88.29/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., advanced $1.09 to $87.81/bbl.

Heating oil for December delivery increased 3.52¢ to $2.44/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed 5.12¢ to $2.24/gal.

The December natural gas contract fell 16.4¢ to $4.05/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 21.3¢ to $3.98/MMbtu.

In London, the December IPE contract for North Sea Brent crude was up 63¢ to $88.96/bbl. Gas oil for November gained $6.25 to $753.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 35¢ to $85.27/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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