MARKET WATCH: Energy prices rebound with market hopes

After falling heavily for three sessions, energy prices bounced higher Oct. 5 with crude oil up 3% to nearly $80/bbl in the New York market in anticipation of recapitalization of European banks and with a larger-than-expected draw of US inventories.

Equity and commodity prices continued to rise in early trading Oct. 6 after the European Central Bank offered new emergency loans to European banks. However, in his last news conference before retiring at the end of this month, ECB President Jean-Claude Trichet did not mention the possibility of an interest rate cut despite mounting fears of another recession. Several economists have said ECB should reduce its key refinancing rate from 1.5% to prevent a rapid economic downturn.

In the petroleum market, James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Gasoline cracks strengthened while distillate cracks lagged crude gains, both of which were largely driven by the weekly US inventory report. The West Texas Intermediate structure strengthened further after the Department of Energy confirmed another week of stock draw at Cushing, Okla., while the North Sea Brent structure remained firm.”

US inventories

DOE’s Energy Information Administration reported commercial US inventories of crude dropped 4.7 million bbl to 336.3 million bbl in the week ended Sept. 30, counter to the Wall Street consensus for a 1.5 million bbl increase. Gasoline stocks decreased 1.1 million bbl to 213.7 million bbl in the same week, still above average for this time of year. Analysts also were expecting an increase of 1.5 million bbl in gasoline. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased 700,000 bbl to 156.9 million bbl, exceeding expectations of a 300,000 bbl decline (OGJ Online, Oct. 5, 2011).

On Oct. 6, the EIA reported the injection of 97 bcf of natural gas into US underground storage in the week ended Sept. 30, down from Wall Street’s consensus of 99 bcf. This raised working gas in storage above 3.4 tcf, down 78 bcf from the year-ago level but 28 bcf above the 5-year average.

The American Petroleum Institute earlier reported US crude stocks fell 3.07 million bbl to 344.2 million bbl last week. It said gasoline inventories dropped nearly 5 million bbl to 212.4 million bbl in the same period while distillate fuel stocks lost 2 million bbl to 155 million bbl.

In Houston, analysts at Raymond James & Associates Inc., noted the 10th consecutive week of draws of crude from the key storage point at Cushing, Okla., down 800,000 bbl in the latest EIA survey. “An 800,000 b/d decline in imports probably helped contribute to [the latest] draws,” they said. “With the summer driving season well behind us, it was somewhat surprising to see a draw in gasoline, which reversed course after posting 4 consecutive weeks of builds. The demand picture remains lackluster, with total petroleum demand relatively flat week over week (up 0.1%) and down 2.9% year over year on a 4-week moving average basis.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said the EIA report indicated a total US stock draw of 4.6 million bbl but a 5.7 million bbl stock draw in the crude plus clean petroleum products category (CPP). “Those overall combined stocks are still at historically comfortable levels, and the main price-positive concern in the report was, in our opinion, in the strong crude oil stock draw of 5.2 million bbl reported in the US Gulf Coast,” he said.

He noted DOE figures for Gulf Coast crude stocks are “still a high 7 million bbl below” the API figures for the same region. “We tend to put greater trust in the DOE data, but in the past there has been corrections both ways. Hence while we go with the DOE data, there is still a risk that the DOE data is underestimating by 7 million bbl the US Gulf Coast crude oil stocks. On a DOE basis, the US Gulf Coast stocks are starting to be relatively low given that US Gulf Coast refineries continue to operate at a high rate,” Jakob said.

“On the other hand, the US East Coast refinery runs are lower and should move down further, given that on top of the full closure of [ConocoPhillips’s 185,000 b/d] Trainer refinery [in Pennsylvania] there are also a series of refinery ‘hiccups’ starting to impact other East Coast refineries. The reported gasoline imports into [the East Coast region] are at a record low for the week,” he said. If current refinery shutdowns carry over into 2012, Jakob said, market sentiment could shift from being bullish on Brent crude supply to being bullish on product production.

“The premiums for Forties have started to come off from their recent peaks, and we continue to expect that it will be difficult for Brent to roll its current prompt backwardation into 2012,” said Jakob. “For now, US gasoline stocks are comfortable compared to history, but the refinery closures will gradually complicate things going into 2012. Distillate stocks had a 700,000 bbl draw but remain high on a historical basis. The 4-week average CPP implied oil demand is slightly down (by 0.9%) vs. a year ago, with gasoline down 1.7% and distillates up 2%.”

In other news, there were more indications of a lagging economic recovery. Officials said Oct. 6 the average rate on a 30-year fixed mortgage fell below 4% for the first time ever, to 3.94%, and may fall even further. Mortgage rates have been below 5% virtually all year but still failed to boost home sales.

Investors and buyers are reluctant to take on credit risks in this period of high unemployment. The Labor Department said initial applications for unemployment benefits increased by 6,000 to 401,000 in the week ended Oct. 1.

Energy prices

The November contract for benchmark US sweet, light crudes jumped $4.01 to $79.68/bbl Oct. 5 on the New York Mercantile Exchange. The December contract escalated $3.96 to $79.83/bbl. On the US spot market, WTI at Cushing stayed in step with the front-month crude futures contract, up $4.01 to $79.68/bbl.

Jakob sees the first line of resistance to higher market prices on NYMEX at $80/bbl for WTI, with subsequent tests at $81.10/bbl, $82.10/bbl “and a real test at $83.60/bbl.” He puts the first line of price support at $79.50/bbl.

Heating oil for November delivery increased 5.32¢ to $2.78/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed 8.08¢ to $2.57/gal.

The November contract for natural gas dropped 6.8¢ to $3.57/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., advanced 2.2¢ to $3.61/MMbtu.

In London, the November IPE contract for Brent gained $2.94 to $102.73/bbl. Gas oil for October was up $2.75 to $868/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.31 to $99.90/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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