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MARKET WATCH: Weak demand, increased supply bring down energy prices

Oil prices continued declining Apr. 10 with crude down 1.5% in the New York market under pressure from weaker equities and increased physical supply.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported West Texas Intermediate fared better than Brent in yesterday’s market on expectations the pending Midwest-to-Gulf Coast reversal of the Seaway Pipeline will reduce the supply glut at Cushing, Okla. “Oil products mostly followed the crude market yesterday, and they are likely to underperform in the next few sessions on the back of improved product inventories and softer demand.”

The broader market remained negative for the fifth consecutive session as the Dow Jones Industrial Average Index declined 1.7% in response to “soaring yields on too-big-to-bail Italian and Spanish debt,” resurrecting concerns of an European debt meltdown, said analysts in the Houston office of Raymond James & Associates Inc.

They also reported, “The front-month natural gas contract ended the day dangerously close to the $2/Mcf mark (down nearly 4%).”

Zhang said, “The Euro-zone debt situation made a turn for the worse in recent weeks as Spanish government bonds are reaching the lows last seen in December. With the Euro-zone so far still failing to grow its way out of trouble, the debt crisis looks set to rumble on for a prolonged period. Clearly, the equity market responded rather bearishly to the development, which in turn dragged the oil price lower.”

Meanwhile, the Associated Press reported Greek Prime Minister Lucas Papademos called Apr. 11 for a May 6 general election in Greece after his coalition government pushed through landmark financial relief deals that rescued the country from the threat of bankruptcy but doomed recession-hit Greeks to greater hardship. Papademos, a former vice-president of the European Central Bank, was appointed prime minister in November.

In other news, the market remains skeptical of any breakthrough in negotiations between Iran and members of the United Nation’s security council scheduled Apr. 17. “The market rallied slightly during early trading yesterday when the headlines reported that Iran has cut exports to Germany and Italy. Except for a very small possibility of military conflict, we tend to side with Saudi Arabia and the US in terms of the future direction of the oil market, for the moment at least, given their enormous potential influence over the market,” Zhang said.

Gas outlook

Pritchard Capital Partners LLC reduced its natural gas price forecast for 2012 to $2.50/MMbtu from $3.30/MMbtu and for 2013 to $3.30/MMbtu from $4/MMbtu. “Our midcycle price goes to $4/MMbtu from $5/MMbtu. There is no change in our oil price forecasts of $99.60/bbl for 2012, $95/bbl for 2013, and midcycle of $90/bbl,” company analysts said.

In the market, they said, gas prices continue to hover around $2/MMbtu, with the first quarter Henry Hub spot market price averaging $2.43/MMbtu. “Stockpiles for the week ended Mar. 30 stood at 2.479 tcf, more than 1 tcf above the 10-year average storage number of 1.433 tcf for the end of the withdrawal season,” Pritchard Capital analysts reported. “Driven by rising output from horizontal drilling in shale formations, US-marketed gas production will average an all-time high of 67.91 bcfd in 2012, up 2.6% from 2011, and will continue to grow by 0.7% as per the Energy Information Administration’s Mar. 6 Short-Term Energy Outlook.”

Pritchard Capital analysts said, “While a number of large producers are reducing their dry gas drilling to zero, they are not forecasting significant drops in absolute dry gas production, implying a large amount of dry gas is being produced in association with crude oil, condensate, or NGL production. As drilling for liquids continues to increase, it suggests achieving a market balance of dry gas will be a drawn-out affair. That said, the current downtrend in natural gas prices in our view will likely find bottom as utilities increasingly prefer gas over coal for power generation. We believe there is considerable potential switching capacity yet available; however, the decision to switch fuels is multivariate and proprietary.”

US inventories

EIA said Apr. 11 commercial US crude inventories increased by 2.8 million bbl to 365.2 million bbl in the week ended Apr. 6, exceeding the Wall Street consensus for 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.

The import of crude into the US decreased by 1.3 million b/d to 8.5 million b/d last week. In the 4 weeks through Apr. 6, crude imports averaged 8.9 million b/d, up just 38,000 b/d from the comparable period a year ago. Gasoline imports last week averaged 705,000 b/d while distillate fuel imports averaged 64,000 b/d.

Input of crude into US refineries last week fell by 395,000 b/d to 14.4 million b/d with units operating at 83.8% of capacity. Gasoline production decreased to 8.9 million b/d, and distillate fuel production decreased to 4.3 million b/d.

Energy prices

The May contract for benchmark US light, sweet crudes dropped $1.44 to $101.02/bbl Apr. 10 on the New York Mercantile Exchange. The June contract lost $1.42 to $101.56/bbl. On the US spot market, WTI at Cushing was down $1.44 to $101.02/bbl.

Heating oil for May delivery declined 5.02¢ to $3.10/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 4.71¢ to $3.25/gal.

The May natural gas contract fell 7.6¢ to $2.03/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.8¢ but closed essentially unchanged at a rounded $1.98/MMbtu

In London, the May IPE contract for North Sea Brent was down $2.79 to $119.88/bbl. Gas oil for April regained 25¢ to $993.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined $1.02 to $119.38/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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