OGJ Senior Writer
HOUSTON, Jan. 14 -- A smaller-than-expected draw of natural gas from US underground storage triggered a 3% drop in the February contract Jan. 13 in the New York market; crude declined 0.5% from a 2-year high, ending a 3-day rally still above $91/bbl.
The broader equity market closed slightly down for the day “on the back of a few bearish economic data points,” said analysts in the Houston office of Raymond James & Associates Inc. Energy stocks underperformed slightly.
The Energy Information Administration reported the withdrawal of 138 bcf of natural gas from US underground storage in the week ended Jan. 7, less than the Wall Street consensus for a decline of 146 bcf. The latest draw reduced working gas in storage to 2.959 tcf. That’s 69 bcf more gas in storage than in the same period a year ago and 161 bcf above the 5-year average (OGJ Online, Jan. 13, 2011).
The price spread between front-month contracts for West Texas Intermediate and North Sea Brent crude continued to slip, “declining another 74¢/bbl to settle at a new recent low of $7/bbl yesterday,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.
“The strength in front-month Brent is partly due to the backwardation between the first two contract months. The February Brent future contract closed 77¢/bbl higher than the March contract, which is more widely traded now as the contract is scheduled to roll today,” Zhang said.
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “We were expecting the Brent premium vs. WTI to increase in the first days of 2011 on the back of funds shifting some of the WTI exposure to Brent for the difference in roll economics and on the back of the Standard & Poor’s Goldman Sachs Commodity Index [a composite of commodity sector returns] increasing its crude weights in Brent and lowering them in WTI.”
WTI should remain at a discount to Brent due to “changes in the supply infrastructure of the US Midwest (increased pipeline capacity from Canada and increased supplies from North Dakota),” he said. Since most of the shift of funds should be complete, “…we are not convinced that the extreme front premium of Brent to WTI (March or April) can be sustained.” Jakob said, “We have had in 2010 and also in 2009 occurrences where Brent was at an extreme premium to WTI but that was linked to a ‘super contango’ in WTI where the extreme contango of WTI was the cause of the prompt weakness of WTI vs. Brent.”
But now, he said, “While WTI is in a contango, it is not in a ‘super contango,’ and while Brent is in backwardation, it also is not yet in a ‘super backwardation.’ The February-March Brent backwardation is pretty steep in the final day of the contract, but end of contract volatility in that cash contract is usual, while the Brent March-April backwardation is only in single digits (and easing over the last 2 days) and April-May in Brent is in a small contango.”
Basically, Jakob said, “While we see on a time-spread difference a justification for WTI to trade at a discount to Brent, we do not see…justification for March or April WTI to trade at a $6/bbl discount to Brent.” Jakob acknowledged the rationale for an extreme discount of WTI to Brent during shifts of position. “But we will now discount that input as most of the funds must have now done their rebalancing,” he said. He added, “Given we are not convinced about the sustainability of the front WTI discount to Brent, we are also not convinced about the sustainability of the WTI discount to . . . gasoline.”
In Europe, Zhang said, “The weekly Amsterdam-Rotterdam-Antwerp product inventory showed little surprise. Gas oil inventories decreased by 1%, but started the year with a historical seasonal high. Gasoline stocks rose by 6% to a 10-week high. Both could put further pressure to European refining margins.”
The dollar has weakened against the euro in the last 24 hr. However, Zhang said, “WTI has largely ignored this move.” He said upside momentum may be fading after the recent strong rally of crude. “Should the dollar find strength, we may witness some long liquidation and some profit-taking,” Zhang said.
The February contract for benchmark US light, sweet crudes dropped 46¢ to $91.40/bbl Jan. 13 on the New York Mercantile Exchange. The March contract fell 57¢ to $92.30/bbl. On the US spot market, WTI at Cushing, Okla., was down 46¢ to $91.40, Heating oil for February delivery dipped 0.95¢ to $2.61/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.72¢ to $2.45/gal.
The February contract for natural gas lost 12.4¢ to $4.41/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 5¢ to $4.50/MMbtu.
In London, the February IPE contract for North Sea Brent slipped 6¢ to $98.06/bbl. The new front-month February contract for gas oil dropped $1 to $810.50/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 27¢ to $93.96/bbl.
Contact Sam Fletcher at email@example.com.