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MARKET WATCH: Bearish inventory report brings down oil prices

Energy prices slumped modestly Dec. 7 following a bearish US government report on oil inventories.

“A larger-than-expected build in gasoline and distillates was compounded by an unexpected build in crude,” said analysts in the Houston office of Raymond James & Associates Inc. “An increase in total petroleum imports (up 720,000 b/d) helped contribute to the build.”

The US Department of Energy’s Energy Information Administration said commercial US inventories of crude increased by 1.3 million bbl to 336.1 million bbl in the week ended Dec. 2, opposite the Wall Street consensus for a 1.3 million bbl decline. Gasoline stocks jumped by 5.1 million bbl to 215 million bbl, exceeding market expectations of a 900,000 bbl gain. Distillate fuel inventories climbed 2.5 million bbl to 141 million bbl, more than double traders’ outlook for a 1.2 million bbl increase (OGJ Online, Dec. 7, 2011).

EIA reported Dec. 8 the withdrawal of 20 bcf of natural gas from US underground storage during the week ended Dec. 2, leaving 3.83 tcf of working gas in storage. Current gas in storage is 102 bcf higher than a year ago and 307 bcf above the 5-year average.

“Gasoline [prices] fell sharply and distillates also declined as product inventories grew sharply week over week, which resulted in much lower refining margins,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Consequently, the term structures of crude and physical crude differentials weakened in anticipation of softening demand for physical crude oil. Volatility has [reduced] over the past week but remains elevated compared to historical levels.”

Raymond James analysts noted Cushing, Okla., inventories fell for the third consecutive week, down a “modest” 200,000 bbl last week. Refinery utilization increased from 84.6% to 87.7%, as the New York market’s 3-2-1 crack spread snapped a 6-week skid. Total petroleum demand rose 2% last week to 18.3 million b/d but is down 2.1% from a year ago on a 4-week moving average.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “For a second week in a row the DOE is showing a 9.2 million bbl stock build in the main category of crude plus clean petroleum products. The US is simply running its refineries too high vs. domestic demand. The 4-week average implied demand is 2.5 million b/d lower than in the same 2007 week, but the US crude runs are only 500,000 b/d lower than in 2007. For those levels of crude oil runs, the US needs to aggressively export products. [Despite] some structural growth in Latin America, US product exports to Europe are under threat. Europe will be in recession, and on top of that, winter has started on the mild side. The water levels on the Rhine might be rising but the diesel and low-sulfur heating oil premiums are not.”

Crude imports into the DOE’s Petroleum Administration for Defense District (PADD) 2 in the Midwestern US from Canada “have reached a new all-time record high on the 4-week average, but the PADD 2 refineries are being driven pedal-to-the-metal as they need to cash in on the substantial margins that the West Texas Intermediate hub is still providing,” said Jakob. However, he said, “With the reversal of the Seaway pipeline, it is not a given that the Midwest refineries will enjoy the same processing economics next year.”

Crude stocks on the US Gulf Coast are flat and “trending towards parity to previous years for the end of the year tax declaration,” Jakob reported. “We continue to expect the US to rebuild crude oil stocks during January and February, and this view is reenforced by the poor refining economics on the US Gulf Coast that should translate in some run cuts but also by the high production reported by Saudi Arabia for November which should translate in higher crude oil arrivals in the US after the New Year.”

Overall, he said, “On both sides of the Atlantic demand remains poor. The front Brent backwardation continues to erode, the front gasoline crack remains negative, the European Distillates premiums are not improving despite the higher water levels on the Rhine; hence the relative values in oil continue to tell a different story than the flat price of crude oil.”

Jacques Rousseau at RBC Capital Markets LLC said, “The Brent-WTI crude oil differential has contracted faster than we expected, and coupled with weak demand, refining margins have dropped significantly. Accordingly, we are reducing our 2011-13 earnings estimates and refiner price targets. Refining stocks have fallen about 20% on average since early November and are near our ‘floor’ price level in most cases. However, momentum should remain negative due to declining earnings estimates and rising gasoline and distillate inventories until spring maintenance season begins in March.”

He said, “We maintain our view that Midwest oil inventories will increase in the first half of 2012 due to higher production from the Bakken and Canada; however, we would not expect the Brent-WTI spread to exceed $7-10/bbl (the marginal transportation cost of moving oil from the Midwest to the Gulf Coast via rail, barge, trucks, etc.) since the market knows the Seaway reversal is on the horizon. Our forecast calls for the Brent-WTI spread to average $9/bbl in 2012 and $7/bbl in 2013.”

The sharp decline in refining margins should cause coastal refiners to reduce production levels (economic run cuts) in the coming months, Rousseau said.

Eyes on Europe

Meanwhile, Raymond James analysts said, “All eyes remain focused on Europe” where German Chancellor Angela Merkel and French President Nicolas Sarkozy were meeting Dec. 8 with European conservatives to elicit support to keep the euro from collapsing under massive sovereign debts.

The European Central Bank announced it has cut various relevant interest rates by 25 basis points (bps), as was generally expected—not the 50 bps many had hoped for to stem the debt crisis. Stock prices, the value of the euro, and German bund yields declined on the news.

In other news, the US Department of Labor said Dec. 8 the number of initial applications for unemployment benefits dropped last week by 23,000 to a seasonally adjusted 381,000, the lowest level in 9 months. The less volatile 4-week average declined for the ninth time in 11 weeks, down to 393,250, the lowest average since early April. The US unemployment rate fell to 8.6% in November from 9% in October, partly as many of the long-time unemployed gave up looking for jobs.

Energy prices

The January contract for benchmark US sweet, light crudes dropped 79¢ to $100.49/bbl Dec. 7 on the New York Mercantile Exchange. The February contract lost 77¢ to $100.68/bbl. On the US spot market, WTI at Cushing was down 79¢ to $100.49/bbl.

Heating oil for January delivery declined 3.93¢ to $2.98/gal on NYMEX. Reformulated stock for oxygenate blending for the same month contracted by 5.85¢ to $2.59/gal.

The January natural gas contract was down 6.6¢ to $3.42/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., increased 2.7¢ to $3.44/MMbtu.

In London, the January IPE contract for North Sea Brent dropped $1.28 to $109.53/bbl. Gas oil for December declined $1 to $957.25/tonne.

The Organization of Petroleum Exporting Countries office in Vienna was closed Dec. 8, so there was no update issued for its basket of 12 benchmark crudes.

Contact Sam Fletcher at samf@ogjonline.com.


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