MARKET WATCH: Crude oil, natural gas prices rebound

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 14 -- Crude oil prices increased Apr. 13, with front-month crude ending a three-session losing streak in the New York market on a bullish US inventory report showing a large draw in gasoline stocks.

“Natural gas traded 1% higher on forecasts for stronger industrial demand as the US economy recovers,” said analysts in the Houston office of Raymond James & Associates Inc. However, they reported crude, gas, and equity market prices were down in early trading Apr. 14.

Officials of the Energy Information Administration said commercial US inventories of crude increased 1.6 million bbl to 359.3 million bbl in the week ended Apr. 8, exceeding the Wall Street consensus for a 1 million bbl build. Gasoline stocks fell 7 million bbl to 209.7 million bbl, EIA officials said, far outstripping analysts’ expectations of a 1 million bbl drop. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 2.7 million bbl to 150.8 million bbl, counter to the market’s anticipation of a 500,000 bbl increase (OGJ Online, Apr. 13, 2011).

EIA reported Apr. 14 the injection of 28 bcf of natural gas into US underground storage during the week ended Apr. 8. That resulted in just over 1.6 tcf of working gas in storage, down 137 bcf from the same period a year ago but 10 bcf above the 5-year average.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Middle distillates lagged crude moves, while reformulated blend stock for oxygenate blending (RBOB) charged ahead on the back a massive 7 million bbl gasoline inventory draw in the US. The term structure for West Texas Intermediate and North Sea Brent strengthened slightly as flat prices rose, while the term structure for ICE gas oil continued to weaken after the structure moved swiftly into contango for the summer months, right after the April contract expired.”

EIA reported a large decline in refinery run rate, primarily in Petroleum Administration for Defense Districts (PADD) 1 on the East Coast and PADD 3 on the Gulf Coast, “largely caused by unplanned refinery maintenance work,” said Zhang. He noted a draw of 3 million bbl in PADD 1, which would particularly support the New York RBOB contract “due to its delivery location.”

Zhang said, “The total US gasoline inventories have moved decisively below the 5-year average. In addition, PADD 1 gasoline inventory fell to a 5-year seasonal low level. The implied demand for gasoline rose by 88,000 b/d on a 4-week average basis but still set a new seasonal low. The implied demand for distillates fell by 28,000 b/d and was sitting just above a 5-year seasonal low.”

Heating demand for distillates during the first quarter of this year was 140,000 b/d higher than the 5-year average. Zhang said, “Excluding that, distillate demand would have been setting seasonal lows. Overall, US oil demand remains weak relative to historical levels, but is yet to show clear signs that demand has been dampened significantly by high prices.”

He said, “Looking ahead, the oil market is likely to be in a correction mode for a while in the absence of any new headline development; then we expect the oil market to regain its upward momentum on tightening market fundamentals.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Goldman Sachs put the demand destruction theme in the spotlight this week, but strong product draws reported by [EIA] has dimmed the light. The strong product draws are for a big part linked to production problems at refineries rather than the result of a surge of consumer demand, but a stock draw remains a stock draw and will need to be compensated by higher production in weeks to come if a drop of days-of-cover [is] to be avoided. The drop in refinery runs in the East Coast has been particularly sharp. For the week they were at the lowest level on record, the capacity utilization falling down to 39%.”

Jakob said total US petroleum stocks were down 5 million bbl for the week and were 12 million bbl lower than a year ago. “Stocks of crude oil and clean petroleum products were down 7.6 million bbl during the week but are [down] only 3.1 million bbl vs. last year and still above average,” he said. “Refinery runs need to come back or the trend will start to reverse. On the gasoline side, stock deficits vs. last year are broad based across the PADDs.”

Energy prices vs. demand
Analysts at Barclays Capital Commodities Research reported high oil prices have not yet reduced oil demand much either among member of the in the Organization for Economic Cooperation and Development or among non-members. “While in the former, especially in the US, $4/gal [retail] gasoline does represent a psychological barrier, and in the past has been associated with a significant compression in demand, there were other extraneous circumstances that built around the events of 2008. The roots of the 2008 recession lay elsewhere than in oil prices alone,” they said.

In fact, they noted, “Gasoline demand in the US has stayed around 9 million b/d and is running higher year-over-year by 1.3% in the year-to-date. Moreover, current oil demand boasts of significantly altered global income and price elasticities. In particular, permanent changes in transportation behavior have tended to be more gradual. In terms of market impact, not only has the response of OECD demand been only one fifth of its post-1979 response in absolute quantity terms, the ability of non-OECD demand to compensate for OECD weakness is dramatically greater now than it was 30 years ago. In that context, the price levels at which global oil demand is choked off have not been truly tested yet.”

In other news, Zhang said, “It has been reported that the Libyan rebels have started exporting some crude and aim to increasing production. Although this is positive for oil supply, it’s difficult to be confident that Libya’s oil production will be fully restored anytime soon. While protests in Yemen and Syria still persist, the market now appears to be less concerned with the geopolitical risks in the Middle East, North Africa region, as contagion risks to the other major oil producing countries has dissipated.”

In the financial market, the euro continued to climb higher Apr. 13, with the US dollar index hitting the lowest level since November 2009, “which provided support to US dollar denominated commodity prices,” said Zhang.

Energy prices
The May contract for benchmark US sweet, light crudes regained 68¢ to $107.11/bbl Apr. 13 on the New York Mercantile Exchange. The June contract increased 74¢ to $107.71/bbl. On the US spot market, WTI at Cushing, Okla., was up 68¢ to $107.11/bbl to match the front-month futures price.

Heating oil for May delivery rose 3.02¢ to $3.20/gal on NYMEX. RBOB for the same month jumped 7.83¢ to $3.24/gal.

The May natural gas contract rebounded by 4.3¢ to $4.14/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2¢ to $4.12/MMbtu.

In London, the May IPE contract for Brent crude increased $1.96 to $122.88/bbl. The new front-month May contract for gas oil for was up $6.25 to $1,014.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 85¢ to $116.70/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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