The price of crude oil continued climbing, up 2.1% Oct. 25 in the New York market, but the big news is the return to backwardation in that market and the narrowing premium for North Sea Brent crude over West Texas Intermediate.
“Typically bullish, backwardation often indicates a tightening of the supply-demand equation (our long-held view) as producers are incentivized to sell today rather than store supplies for the future,” said analysts in the Houston office of Raymond James & Associates Inc. WTI trades haven’t been in backwardation—with monthly contracts sequentially priced lower than the previous contract—“since Nov. 20, 2008,” they said.
“The WTI-Brent spread also continues to tighten, with the London contract down marginally yesterday,” they said. There was a price difference of $6.75/bbl between front-month contracts for WTI and Brent at the close of trading Oct. 25, down from “a record $27.88/bbl” earlier this month, said Raymond James analysts.
“The broader market continues to discount a less-than-optimistic economic outlook, with the Dow Jones Industrial Average down 1.7% yesterday. This morning, however, positive commentary from China, better-than-expected earnings reports, and a potential increase in new-home sales are all pushing futures up mildly,” they said, with natural gas “still sitting right on the $4/Mcf level.”
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil had a mixed day as Brent weakened slightly while WTI climbed further after the $4/bbl rally on Monday. Light production and fuel oil cracks fell, dragging refining margins lower despite firm middle-distillate cracks.”
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “WTI tried to ride on its momentum to attack the 200-day moving average but was stopped a few basis points off it, and given the late price reversal, it almost printed a ‘shooting star’ [price pattern], which is a bearish reversal warning. In front of an uncertain European Union summit [on Oct. 26], this is not the best technical set up for WTI. If the EU does not perform and induces some selling, then yesterday’s imperfect shooting star will be taken as a significant bearish reversal signal. For the positive momentum to be maintained in WTI, a break of the resistance at $95/bbl needs to occur.”
Meanwhile, Jacob said, “Our view is that the WTI turn to backwardation will not be a structural shift, but we also continue to expect that the Brent premium to WTI will erode further in the first half of 2012 as we think that the backwardation in Brent will narrow next year. The price action of the last 2 days shows the market impact that the systematic contango-backwardation trading models can have, and it will be similarly interesting to watch what will happen to WTI the moment it moves back into a contango.”
Zhang said, “The perceived progress on a radical solution to tackle the Euro-zone debt crisis was damaged by a possible collapse of the current coalition government in Italy last night. However, the euro has risen significantly from its recent low at the beginning of the month—by more than 5%. Furthermore, the equity market has been boosted by third quarter earnings reported in recent weeks. As to the oil market fundamentals, the backwardated structures in both crude oil and most major products continued to indicate a very tight physical market and have been pushing global oil inventories down. Consequently, the upside risk to the oil price will grow if Euro-zone policy-makers manage to prevent a recession in this region. That said, the probability that the Euro-zone crisis will linger on remains significant.”
In other news, Jakob said, “Our main bullish concern for this week was the tropical storm in formation off the coast of Venezuela, but we are taking some of that weather risk off the table given that the models tend now to agree that storm candidate Sean will follow Rina on a track to Florida.”
US inventories
The Energy Information Administration said Oct. 26 commercial US crude inventories climbed by 4.7 million bbl to 337.6 million bbl in the week ended Oct. 21. Gasoline stocks dropped 1.4 million bbl to 204.9 million bbl in the same period as inventories of both finished gasoline and blending components declined. Distillate fuel inventories fell 4.3 million bbl to 145.5 million bbl.
The American Petroleum Institute earlier reported US crude stocks were up 2.7 million bbl to 340 million bbl last week. It said gasoline inventories increased 153,000 bbl to 209.7 million bbl, while distillate fuels decreased 1.8 million bbl to 147.9 million bbl.
EIA said imports of crude into the US increased 1.5 million b/d to 9.4 million b/d last week. In the 4 weeks through Oct. 21, crude imports averaged 8.8 million b/d, down 9,000 b/d from the comparable 4-week period in 2010. Gasoline imports last week averaged 675,000 b/d with distillate fuel imports averaged 147,000 b/d.
The input of crude into US refineries increased by 253,000 b/d to 14.7 million b/d last week, with units operating at 84.8% of capacity. Gasoline production decreased to 8.9 million b/d while distillate fuel production increased to 4.4 million b/d.
Energy prices
The December contract for benchmark US light, sweet crudes climbed as high as $94.65/bbl in intraday trading Oct. 25 before closing at $93.17/bbl, up $1.90 for the day on the New York Mercantile Exchange. The January contract gained $1.79 to $92.93/bbl. On the US spot market, WTI at Cushing, Okla., increased $1.90 to $93/bbl, not yet back in step with the front-month crude futures price.
Heating oil for November delivery dipped 0.44¢ but closed essentially unchanged at a rounded $3.05/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.1¢ to $2.70/gal.
The November natural gas contract rebound by 5.4¢ to $3.66/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued climbing, up 2.5¢ to $3.63/MMbtu.
In London, the December IPE contract for North Sea Brent dropped 53¢ to $110.92/bbl. Gas oil for November was up $4.50 to $957/tonne.
Contact Sam Fletcher at samf@ogjonline.com.
