MARKET WATCH: Energy prices rebound despite bearish inventory report

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 27 -- Energy prices continued to ping-pong Jan. 26, generally recovering most losses from the previous session with crude rebounding 1.3% as the market shrugged off a bearish report of US inventories.

“Long energy investors were excited to see that the nearly 4-month rally still has some legs,” said analysts in the Houston office of Raymond James & Associates Inc. Natural gas rose 0.4% on forecasts for continued cold weather. However, both crude and gas were giving up some of those gains in early trading Jan. 27, they reported.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil appeared to be boosted by strong US new home sales numbers yesterday.” In addition, the Federal Reserve System left policy essentially unchanged in a board meeting Jan. 26. “The market took the Fed’s dovish signal and pushed the Dow Jones Industrial Average through 12,000,” said Zhang.

WTI-Brent spread
Zhang reported, “The front-month West Texas Intermediate-Brent spread weakened further, to $10.87/bbl [in favor of Brent], on the back of a 900,000 crude inventory build at Cushing, Okla. Product cracks moved higher as US refineries reduced runs due to seasonal maintenance. Meanwhile, the WTI term structure continues to weaken as US crude inventories rise.”

He said, “We expect the tug of war between WTI and Brent to continue. It appears as though Brent will have another go at $100/bbl, while WTI could drift down to $85 or even lower. At the moment, we place a higher probability on WTI dragging Brent lower than for Brent to pull WTI higher. Consumers may therefore look to step in and take advantage of the current weakness in the market.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The main dynamic of the oil market remains the ever-widening Brent premium to WTI. There were no particularly bullish inputs yesterday, but Brent is racing towards $100/bbl like there is no tomorrow, and the Brent premium to WTI continues to widen to unprecedented levels.”

However, the current premium of Brent to WTI “cannot be compared to the levels of early 2009 since the dynamics are completely different,” Jakob noted. “In early 2009, Brent was trading at a premium to WTI that is comparable to the levels of today, but that premium was only visible in the front rolling month and was not carried in the following months until they became the front rolling position. This time around, it is very different because the extraordinary Brent premium to WTI is visible not only in the front rolling month but also in the forward month with the entire curve moving in sync.”

A high level of crude storage in Cushing was responsible for a WTI contango in early 2009. Still, Jakob said, “The Brent premium [over] WTI in early 2009 was not really a premium but purely the side-effect of the extreme contango on the front month of WTI when February-March WTI went down to a contango of $9/bbl and March-April down to a contango of $8/bbl.”

The current Brent premium to WTI is “very different” because it is not due to extreme weakness in the WTI contango. WTI is in a wide contango but “nowhere near” the contangos of 2009, he said.

“What is trying to be priced currently is not really a market specific supply and demand in Europe or in the US but a move of WTI to a structural discount to Brent and at a very significant level,” Jakob said. “However given the implications that this has on cash differentials, cracks, etc., we remain unconvinced for now about the sustainability of the current Brent premium to WTI. The traditional product cracks (heating oil vs. WTI, reformulated blend stock for oxygenate blending vs. WTI) have become totally irrelevant in our opinion as they have become only an extension of the Brent-WTI spread.”

In other news, Apache Corp.’s stock was “weak” in Jan. 26 trading due to civil unrest in Egypt where the company has large holdings. “With 2009 reserves of 309 million boe and third quarter 2010 production of 160,000 boe/d, Egypt makes up 13% of total company proved reserves and 24% of current production—not a small part of global operations,” said Raymond James analysts.

“While Apache's 11 million gross acres (across 21 concession licenses) are primarily located in the remote Western Desert and thus unlikely to be affected by operational disturbances (tampering, protests, demonstrations), market fears are primarily focused on a potential regime change or economic reforms. Having been in power for 30 years, the pro-business Mubarak government has come under pressure following the overthrow of Tunisia's president just 2 weeks ago,” they said. “We view the odds of a full government upheaval or regime change to be a very low probability but will continue to monitor the situation in light of the meaningful effects on Apache's asset base.

US storage
The Energy Information Administration reported Jan. 27 the withdrawal of 174 bcf of natural gas from US underground storage in the week ended Jan. 21, more than the Wall Street consensus of a 172 bcf pull. That reduced working gas in storage to 2.5 tcf. That’s 9 bcf more than was in storage in the same period a year ago and 29 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories increased by 4.8 million bbl to 340.6 million bbl in the same week, well beyond the Wall Street consensus for a build of 1.2 million bbl. Gasoline stocks climbed by 2.4 million bbl to 230.1 million bbl in the same period, a little more than the 2.3 million bbl increase analysts expected. Distillate fuel inventories fell 100,000 bbl to 165.7 million bbl, short of an anticipated 500,000 bbl drop (OGJ Online, Jan. 26. 2011).

Zhang noted, “Both gasoline production and distillates production were lower on the back of lower refinery runs. On a 4-week average basis, implied demand for gasoline shows a sharp drop of 192,000 b/d, albeit this is partly seasonal.” The latest inventory reports “suggest that the seasonal trend of US crude inventory build-up has started to form,” he said.

Jakob said, “The US has plenty of diesel stocks to allow higher exports or lower refinery runs. Stocks of heating oil are being reduced as temperatures remain below normal, but the days left of winter are starting to be counted. Gasoline continues to build, not a seasonal aberration and stocks are at par to the levels of a year ago.”

He said, “With the Brent premium to WTI and the dollar [still] weak but not as weak as in 2008, the average retail gasoline price in Europe is back to the peaks of the summer of 2008.”

Energy prices
The March contract for benchmark US light, sweet crudes rebounded by $1.14 to $87.33/bbl Jan. 26 on the New York Mercantile Exchange. The April contract reclaimed $1.47 to $89.35/bbl. On the US spot market, WTI at Cushing jumped $2.14 to match the front-month futures price of $87.33/bbl. Heating oil for February delivery increased 7.69¢ to $2.67/gal on NYMEX. RBOB for the same month was up 8.79¢ to $2.43/gal.

The February contract for natural gas regained 1.8¢ to $4.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued falling, down 7.5¢ to $4.41/MMbtu.

In London, the March IPE contract for North Sea Brent soared by $2.66 to $97.91/bbl. The February contract for gas oil escalated by $11 to $810/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 75¢ to $92.58/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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