MARKET WATCH: Crude oil prices continue to climb

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 12 -- The front-month crude contract continued climbing Jan. 11 in the New York market, up 2% as two North Sea fields came offline and the Trans-Alaska Pipeline remained closed. Natural gas prices gained 1.8% on forecasts for continued cold weather.

“Energy stocks drove the broader market higher, with the S&P 500 closing up 0.4%,” said analysts in the Houston office of Raymond James & Associates Inc.

However, Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “Interruptions on the Eugene platform in the US Gulf of Mexico made big headlines yesterday and was detailed much later as a 1-hr interruption; interruption on the Snorre and Vigdis platforms in the North Sea made as well big headlines, but the fields are already back on line today. That leaves the interruption on the Trans-Alaska Pipeline, which has restarted overnight on a temporary basis to prevent the risk of freezing. Russia has stopped oil deliveries to Belarus, but that is normal price ‘negotiation’ tactics for Russia.”

The 630,000 b/d Trans-Alaska Pipeline will run at a reduced rate for a couple of days while a 24-in., 170-ft bypass around the leaking pump station is readied for installation. The pipeline again will have to be shut down when the bypass is installed (OGJ Online, Jan. 11, 2011). The process in cold weather could cause equipment failures and another oil spill, officials said. However, if the pipeline were to be idle too long, oil storage could fill and the unmoving oil in the pipeline could cause damage to it and to North Slope wells. Alyeska Pipeline Service Co., operator, indicated the pipeline may be operating normally by Jan. 14.

US inventories
The Energy Information Administration said Jan. 12 commercial US crude inventories fell 2.2 million bbl to 333.1 million bbl in week ended Jan. 12, exceeding the Wall Street consensus for a 1.4 million bbl decline. Crude inventories remain above average for this time of year. On the other hand, gasoline stocks jumped by 5.1 million bbl to 223.2 million bbl, also above average. Analysts were expecting an increase of 2.1 million bbl. Finished gasoline inventories decreased while blending components inventories increased during the week. Distillate fuel stocks were up 2.7 million bbl to 164.8 million bbl, compared with market expectations of a 1 million bbl build. It too is above average, EIA officials said.

The American Petroleum Institute earlier reported US crude inventories inched up just 57,000 bbl to 337.1 million bbl in the week ended Jan. 7. It said gasoline stocks shot up 7 million bbl to 229 million bbl, while distillate fuel increased 1.6 million bbl to 166.5 million bbl.

Imports of crude into the US increased by 449,000 b/d to 8.9 million b/d last week, EIA said. In the 4 weeks through Jan. 7, crude imports averaged 8.7 million b/d, up by 478,000 b/d from the comparable period in 2010. Gasoline imports averaged 871,000 b/d, and distillate imports averaged 368,000 b/d.

The input of crude into US refineries, however, dropped 260,000 b/d to 14.7 million b/d with units operating at 86.4% of capacity, EIA reported. Gasoline production dropped to 8.7 million b/d, while distillates were down to 4.5 million b/d.

WTI-Brent spread
Jakob said, “US gasoline stocks are at multiyear highs for the season, and one of the main reasons why the reformulated blend stock for oxygenate blending (RBOB)-West Texas Intermediate crack has improved over the last 10 days is because of the collapse of WTI vs. North Sea Brent. The RBOB crack to Brent has not improved at all, and the contango on RBOB is increasing. Given that the strong RBOB-WTI crack is solely a function of the wide discount of WTI to Brent, we are of the opinion that it is better to be out of any length on the RBOB-WTI spread and for those that believe in WTI moving to an even greater discount to Brent, then to have to exposure being long Brent vs. WTI rather than being long RBOB vs. WTI.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, observed, “The front month WTI-Brent spread settled at $6.50/bbl [on Jan. 11], the lowest level since February 2009 and amid the height of financial crisis. For the most part of 2010, WTI traded at a discount to Brent, with the average of the spread for 2010 as a whole, coming in at negative 76¢/bbl.”

He said, “There have been three main reasons that have put pressure on the spread. Firstly, US demand had been lagging behind the emerging markets whose imports are more likely to be priced on a Brent basis. Secondly, [oil storage and delivery at] Cushing, Okla., continues to be constrained by its landlocked location. Thirdly, the flow of investment money is shifting from WTI to Brent.”

Since April, Cushing crude inventories have remained at historically high levels, and Standard Bank’s storage model suggests this will continue, “given the positive return on storage for WTI.” In addition, the second phase of the Keystone XL crude pipeline project is expected to come into operation in the first quarter and will increase the crude pipeline capacity from Canada to Cushing (OGJ Online, Dec. 20, 2010). According to US Department of Energy figures, Cushing has a storage capacity of 45.8 million bbl as of Sept. 30th and a current inventory level of 36.6 million bbl. “However, it has been reported that Cushing capacity should be as high as 56 million bbl,” Zhang said.

“With the increasing liquidity in Brent, many major commodity indices increased their exposure to Brent at the expense of WTI,” he said. “The spread is likely to narrow when the Trans-Alaska Pipeline returns to normal services. However, the spread will nevertheless remain under pressure for the coming months due to slow pick-up in US demand and Cushing storage constraints.”

Energy prices
The February contract for benchmark US sweet, light crudes escalated by $1.86 to $91.11/bbl Jan. 11 on the New York Mercantile Exchange. The March contract climbed $1.78 to $92.36/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.86 to $91.11/bbl. Heating oil for February delivery gained 5.27¢ to $2.61/gal on NYMEX. RBOB for the same month increased 2.41¢ to $2.48/gal.

The February natural gas contract rebounded, up 82¢ to $4.48/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 8.6¢ to $4.40/MMbtu.

In London, the February IPE contract for North Sea Brent crude gained $1.91 to $97.61/bbl. Gas oil for January climbed $12 to $794.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $1.59 to $92.92/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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