MARKET WATCH: Oil prices increase on indications of economic improvement

Oil prices increased Apr. 11, pulled along by a turnaround in the broader market that broke a 5-day losing streak through renewed hope the European Central Bank can ease Spain's economic woes through a bond-purchase program and the encouraging Federal Reserve outlook for modest expansion.

In Houston, however, analysts at Raymond James & Associates Inc. reported, “Natural gas bucked this trend and closed below $2/Mcf [in the New York market] for the first time since January 2002 as supply continues to outpace demand despite a significant drop in the gas rig count.”

They also reported, “Yesterday's petroleum inventories update was bullish relative to consensus as larger-than-expected draws in gasoline and distillates were only partially offset by a slightly larger-than-expected build in crude. Combining crude, gasoline, and distillates, inventories fell 5.5 million bbl this week, compared to the consensus forecast for a build of 300,000 bbl. Contributing to the draw, total petroleum imports fell by 1.4 million bbl (down 12%) week-over-week.” Following the inventory report, crude rose in afternoon trading to finish up 1.7%.

US inventories

The Energy Information Administration reported Apr. 12 the injection of 8 bcf of natural gas into US underground storage in the week ended Apr. 6. That was below the Wall Street consensus for an injection of 21 bcf and left 2.487 tcf of working gas in storage. Gas stocks are up 888 bcf from the year-ago level and 920 bcf above the 5-year average.

Pritchard Capital Partners LLC analysts reported, “Coal-to-gas fuel switching likely remains an important source of consumption but requires the continuation of low gas prices, probably below $2.50/MMbtu.” In addition, they said, “Should storage levels reach the point that stored gas competes with production gas, we could see very low gas prices but probably not for very long. We estimate that if pressed the storage system can accept up to 4.4 tcf of working gas, and with the big demand months of December through February following closely, operators would likely be unmotivated to drop storage levels much below that required to safely maintain operations. Finally, if production cannot gain pipeline access due to nearly full storage, shut-ins may ensue and reduce produced gas to market accordingly.”

EIA earlier reported commercial US crude inventories increased by 2.8 million bbl to 365.2 million bbl in the week ended Apr. 6, exceeding Wall Street’s expectation of a 2 million bbl build. Gasoline stocks fell 4.3 million bbl to 217.6 million bbl, well past analysts’ expectation of a 1.4 million bbl draw. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 4 million bbl to 131.9 million bbl last week; the market expected only a 300,000 bbl decline (OGJ Online, Apr. 11, 2012).

Raymond James analysts said, “Total petroleum demand was up 4.5% week-over-week, but remains down 3.2% compared to the same period last year after adjusting 2011 weekly numbers to reflect monthly actuals. Gasoline demand fell 1.2% this week and is down 1.1% year-over-year with a similar adjustment. Combining supply and demand, days of supply fell by more than 2 days but remain on par with levels from last year.”

The latest EIA report “showed a total US stock draw of 3.9 million bbl but given that in the same week last year the stocks were being reduced by 4.9 million bbl, the stock surplus vs. last year increased to 32.5 million bbl and is still at a multiyear high for the comparable week,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

The draw of US gasoline stocks “pulled the RBOB gasoline crack to Brent significantly higher yesterday.  However, gasoline stocks had a 7 million bbl draw in the same week last year, hence the stock surplus to last year is increasing to 8 million bbl, with most of the year-on-year surplus in [the East Coast and the Midwest],” Jakob said.

Stocks of crude on the US Gulf Coast increased by 2.1 million bbl and have built by 18 million bbl since the beginning of March. Jakob said, “The higher shipments from Saudi Arabia should start to materialize at the end of the month and given the higher flows that will come from [the Midwest] in the summer (via the Seaway pipeline) the Gulf Coast is well supplied in front of the summer season. For the last 2 days the premium of Brent vs. West Texas Intermediate has been shrinking; the main action yesterday in crude oil was on the Brent-WTI spread, not on outright flat price. Crude oil refinery intake [in the Midwest] has been gradually rebounding over the last 2 weeks, and crude oil imports from Canada were also down on the week (on the 4-week average, however, they are at a new record high). Stocks in Cushing, Okla., were flat, and we estimate them to be filled at only 68% of capacity. The Keystone pipeline to Cushing will be undergoing maintenance Apr. 27-May 3 although the company claims it will have no incidence on flows.”

Energy prices

The May contract for benchmark US sweet, light crudes recouped $1.68 to $102.70/bbl Apr. 11 on the New York Mercantile Exchange. The June contract regained $1.62 to $103.18/bbl. On the US spot market, WTI at Cushing was up $1.68 to $102.70/bbl.

Heating oil for May delivery reclaimed 1.92¢ to $3.11/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 4.59¢ to $3.30/gal.

The May natural gas contract dropped 4.7¢ to $1.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 7.3¢ to $1.91/MMbtu.

In London, the May IPE contract for North Sea Brent gained 30¢ to $120.18/bbl. Gas oil for April rebound by $5.50 to $999/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $1.58 to $117.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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