MARKET WATCH: Strong earnings, Seaway Pipeline lift oil prices

Front-month crude climbed 1.2% Apr. 17 in the New York futures market in anticipation of an earlier reversal of the Seaway Pipeline to carry oil from the Midwest to the Gulf Coast. Oil prices also were supported by strong earnings in the broader market.

“The Standard & Poor’s 500 index was up 1.6% on the day. Energy markets followed suit, with the EPX [SIG Oil Exploration & Production Index] and OSX [Oil Service Index] up 2% and 1.8%, respectively,” said analysts in the Houston office of Raymond James & Associates Inc. Natural gas, however, was down 3.2%. S&P futures were down in early trading Apr. 18, undercut by the long-running Euro-zone debt crisis, while crude and gas prices also declined.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Crude oil futures continue to be the story of readjusting for the Seaway flows starting at the end of May. If one considers the cost of pipeline or train transportation, there is no clear justification for the Light Louisiana Sweet (i.e. Brent) vs. West Texas Intermediate spread to trade above a $7-10/bbl range. A higher spread could be justified when there is a significant time-spread roll difference between Brent and WTI, but with the falling Brent backwardation even that valuation does calculate for not more than the $7-10/bbl range on Brent-WTI. Both Goldman Sachs and J.P Morgan are targeting $5/bbl for the Brent premium to WTI for the end of the year.

Jakob reported, “The front backwardation roll in Brent is diminishing and is down to a few basis point. In the North Sea cash markets, Forties is reported trading at the lowest cash differentials in 2 years, and that is also putting some pressure on the Brent leg of the Brent-WTI.”

The reformulated stock for oxygenate blending (RBOB) crack and backwardation also were under pressure Apr. 17. “There is significant speculative interest in RBOB futures, and part of that speculative interest has been positioned on the basis that closure of refineries on the US East Coast will tighten considerably the supply and demand for gasoline in that region,” Jakob said. “For now, however, we have to consider the risk [of] the [pending] Delta Air Lines-J.P. Morgan take-over of the ConocoPhillips Trainer refinery while Carlyle Group is now reported showing some interest for the Sunoco Inc. Philadelphia refinery; if confirmed that would reduce some arguments in favor of structural tightness in gasoline. Anyone having a RBOB crack position on the basis of WTI is also taking a hit on the narrowing Brent-WTI spread.”

In other news, US President Barack Obama asked Congress Apr. 17 for a $52 million program that would fund more oversight of oil futures by the Commodities Futures Trading Commission (CFTC). The proposal would increase CFTC personnel and raise penalties tenfold for those convicted of market manipulation. The idea is to crack down on alleged speculators who may influence energy prices.

However, Raymond James analysts said, “None of this strikes us as impactful for the oil market—rather, we believe it's part of the same old rhetoric that has historically surrounded fuel prices in election years. And in any case, we think the odds of Congress approving something along these lines prior to the November election are low.”

The president’s proposal came the same day Venezuela’s oil minister expressed concern that oil prices are declining and charged Middle East members of the Organization of Petroleum Exporting Countries are not following the group’s price policy but are acting more in favor of consumer nations.

“Limits and rules are not a bad thing per se, but politicians ought to be honest enough to admit that one country in the Arabian Gulf is the ultimate regulator and price-maker for oil; that country is also a member of the elite G-20 club [the Group of 20 international forum for economic matters),” Jakob said. “The Obama plan to have the CFTC increase at will the margins requirements in order to control prices is simply ludicrous: for every long on margin there is a short on margin, hence that idea has as much potential to increase as to decrease prices.”

US inventories

The Energy Information Administration said Apr. 18 US commercial crude inventories expanded by 3.9 million bbl to 369 million bbl in the week ended Apr. 13. Gasoline stocks dropped 3.7 million bbl to 214 million bbl. Both finished gasoline and blending components decreased last week. Distillate fuel inventories fell 2.9 million bbl to 129 million last week.

Imports of crude into the US increased by 196,000 b/d to 8.7 million b/d last week. In the 4 weeks through April 13, crude oil imports averaged 9.1 million b/d, up 395,000 b/d from the comparable period a year ago. Gasoline imports last week averaged 427,000 b/d while distillate fuel imports averaged 119,000 b/d.

The input of crude into US refineries increased 99,000 b/d to 14.5 million b/d last week with units operating at 84.6% of capacity. Gasoline production increased slightly to 8.9 million b/d. Distillate fuel production increased to 4.4 million b/d.

Energy prices

The May and June contracts for benchmark US light, sweet crudes each increased by $1.27 to $104.20/bbl and $104.64/bbl, respectively, Apr. 17 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was up $1.27 to $104.20/bbl.

Heating oil for May delivery rose 1¢ to $3.13/gal on NYMEX. RBOB for the same month, however, lost 3.3¢ to $3.23/gal.

The May natural gas contract fell 6.5¢ to $1.95/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.5¢ to $1.88/MMbtu.

In London, the June IPE contract for North Sea Brent advanced 10¢ to $118.78/bbl. Gas oil for May increased 25¢ to $994.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost 71¢ to $116.27/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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