MARKET WATCHUnexpected inventory changes undermine crude prices

Oct. 19, 2006
Crude futures prices fell Oct. 18 in the New York market on reports of an increase in US crude inventories and declines in gasoline and heating oil stocks that were all bigger than expected, with refineries operating at 86.3% of capacity as some facilities shut down for seasonal maintenance.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 19 -- Crude futures prices fell Oct. 18 in the New York market on reports of an increase in US crude inventories and declines in gasoline and heating oil stocks that were all bigger than expected, with refineries operating at 86.3% of capacity as some facilities shut down for seasonal maintenance.

The US Energy Information Administration said commercial US crude stocks jumped by 5.1 million bbl to 335.6 million bbl during the week ended Oct. 13, well above the highest expectations of a 2.5 million bbl increase. US gasoline inventories plummeted by 5.2 million bbl to 210.2 million bbl, however, and distillate fuel stocks dropped 4.5 million bbl to 145.4 million bbl (OGJ Online, Oct. 18, 2006). It marked the third consecutive week that crude stocks increased, but it was the first major drop in gasoline inventories since mid-August, analysts said.

"The latest US weekly data are actually the strongest of 2006, in that they show the largest single-week fall in inventories relative to their 5-year average since September 2005. Oil products fell by 12.8 million bbl relative to their 5-year average, while crude oil rose by 3.6 million bbl relative to that average, resulting in the overall fall of 9.2 million bbl," said Paul Horsnell at Barclays Capital Inc., London. "Despite continuing weakness at the bottom of the barrel, overall US oil demand has shown increasing strength this month, with particular strength in gasoline, diesel, and jet fuel."

Horsnell said, "Obviously it will need a few more weeks of data to confirm that the peak in the US inventory overhang had been passed, but the latest data is clearly a major step in the right direction."

OPEC
Ministers of the Organization of Petroleum Exporting Countries are generally expected to approve a 1 million b/d production cut at their Oct. 19 emergency meeting in Qatar. Just prior to that meeting, acting Secretary General Mohamed Barkindo said consensus was building on how to allocate that reduction among members.

"Countries currently failing to meet their quotas—Iran, Venezuela, Nigeria, and Indonesia—are pushing for a cut from the quota amount, whereas others are looking toward trimming real output," said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, Horsnell said, "Iraq's descent is continuing," He projects "a deepening of the civil war" and another year "without effective investment dollars being spent within the oil industry to help keep capacity up." Horsnell said, "We have been penciling in an average [Iraqi crude production] of about 2.1 million b/d in 2007, about the same as in 2006. However, we are beginning to think that forecast is too high, and perhaps 1.8 million b/d might be closer to the mark, with the potential for a more extreme downside to output should the pace of disintegration of national institutions continue at its current pace."

Energy prices
The November contract for benchmark US sweet, light crudes fluctuated between $57.40/bbl and $59.50/bbl Oct. 18 on the New York Mercantile Exchange before closing at $57.65/bbl, down by $1.28 for the day. The December contract dropped $1.36 to $59.30/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.28 to $57.66/bbl. Heating oil for November delivery lost 3.79¢ to $1.70/gal on NYMEX. However, unleaded gasoline for the same month inched up by 0.7¢ to $1.47/gal.

The November natural gas contract jumped by 36.5¢ to a 5-week high of $6.81/MMbtu on NYMEX. "Colder weather over the last 2 weeks has pushed [gas] prices up nearly 25% for the month," said Raymond James analysts.

EIA reported Oct. 19 the injection of 53 bcf of gas into US underground storage in the week ended Oct. 13. That was above the consensus of Wall Street analysts and compared with injections of 62 bcf the previous week and 79 bcf during the same period last year. US gas storage now stands at a record 3.44 tcf, up by 391 bcf from a year ago and 345 bcf above the 5-year average.

In London, the November IPE contract for North Sea Brent dropped $1.36 to $59.58/bbl. The November gas oil contract continued to waffle, down $8.50 to $549/tonne.

The average price for OPEC's basket of 11 benchmark crudes lost 90¢ to $55.27/bbl on Oct. 18, wiping out the gains from the previous session.

Contact Sam Fletcher at [email protected].