Sam Fletcher
OGJ Senior Writer
HOUSTON, Oct. 7 -- Propelled by the plunging US dollar, the front-month benchmark crude contract climbed as high as $71.97/bbl in intraday trading Oct. 6 in the New York market.
“Crude hit a 2-week high [Oct. 6], though it remains range-bound as it's been since early August,” said analysts in the Houston office of Raymond James & Associates Inc. Another boost to oil prices was a strong rally in the equities market amid signs of economic strength. “Australia's central bank unexpectedly raised interest rates, becoming the first country in the Organization for Economic Cooperation and Development to do so this year,” Raymond James reported.
Analysts said petroleum futures prices were held down Oct. 6 by traders’ anticipation of a build in US crude inventories. Instead, the Energy Information Administration said Oct. 7 commercial US crude inventories decreased by 1 million bbl to 337.4 million bbl in the week ended Oct. 2. That compared with the American Petroleum Institute’s earlier bullish estimate of a 2.7 million bbl draw and the Wall Street consensus of a 2 million bbl build. Still, crude stocks remain above average for this time of year.
US gasoline climbed 2.9 million bbl to 214.4 million bbl in the same week. That was up from analysts’ consensus of a 1 million bbl increase. Distillate fuel inventories increased by 700,000 bbl to 171.8 million bbl, vs. an expected draw of 400,000 bbl.
Imports of crude into the US fell 435,000 b/d to 9.1 million b/d in the same week. Refinery input increased by 16,000 b/d to 14.6 million b/d with units operating at 85% of capacity. Gasoline production increased to 9.4 million b/d while distillate fuel production increased to 4 million b/d.
Outlook for refining
Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Refined product inventories (gasoline plus distillate plus jet fuel) jumped 3.3 million bbl (0.8%) last week primarily due to increased production of gasoline, which at 9.4 million b/d was the highest weekly total since August 2008. This higher supply more than offset modest demand gains and increased both gasoline and distillate inventories, which both remain well above average. We expect high inventory levels and weak demand to continue placing downward pressure on refining margins in the fourth quarter.”
Olivier Jakob at Petromatrix, Zug, Switzerland, said net exports of 1.4 million b/d of distillates currently account for a large portion of US refinery runs. “With Asia sending [very large crude carriers] of distillates to the Atlantic Basin, that export potential for US refiners is coming under threat. There is simply not enough inland demand for the US refinery capacity,” he said.
As a result, Sunoco Inc., the second-largest US independent refiner, is closing indefinitely all processing units at its 150,000-b/d Eagle Point refinery at Westville, NJ, and shifting current production to other refineries within its system (OGJ Online, Oct. 6, 2009). “As such, the actual amount of barrels taken out of the refined product market will be minimal (i.e., clearly not enough to reset the lackluster margins in the East Coast refining complex),” said Raymond James analysts. “Moreover, Sunoco announced a dividend cut, trimming it in half (to 60¢/share annualized). We don't expect dividend cuts to become systemic within the space, however. At 4.3%, Sunoco's yield was the highest in its peer group.”
Putting the refinery in cold shutdown will optimize its utilization as a storage terminal, said Jakob, who expects more Atlantic Basin refineries to shut down. “This might become a problem next summer for gasoline production, but until then it will become an increasing problem for crude oil demand in the Atlantic Basin as the world cannot indefinitely process crude oil to transform it into floating distillates. Of the 145,000 b/d of crude oil imported by Sunoco’s Eagle Point refinery in July, 111,000 b/d was originating from West Africa and 22,000 b/d from the former Soviet Union. This will not help the contango on [North Sea] Brent crude oil, and we would expect a new floating cycle to develop on Brent related crude oils,” he said.
Valuing the US dollar
The dollar’s latest fall was triggered by press reports that a broad group of nations, including the Gulf States, have discussed replacing the dollar with a basket of currencies for oil transactions.
Robert Fisk, Middle East correspondent for UK newspaper The Independent, reported, “Arab Gulf regimes have been growing increasingly restive at their economic as well as political dependence on Washington for many years. Of the $7.2 trillion in international reserves [of US dollars], $2.1 trillion is held by Arab countries—China holds about $2.3 trillion—and the nations interested in moving away from dollar-trading in oil are believed to hold over 80% of international dollar reserves.” He said these and other countries have been talking both publicly and secretly for 2 years of changing international oil prices to another currency.
However, Jakob at Petromatrix said, “The Fisk hype is not dissimilar to the calls heard last year at $140/bbl that crude would soon reach $300/bbl. For that reason we will watch the action on the dollar index today as fading a hype sell-off would be a warning flag of a bottom (for the dollar).”
Energy prices
The November contract for benchmark US light, sweet crudes closed at $70.88/bbl, up 47¢ Oct. 6 on the New York Mercantile Exchange. The December contract increased 53¢ to $71.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 47¢ to $70.88/bbl. Heating oil for November gained 2.26¢ to $1.81/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month advanced 1.88¢ to $1.77/gal.
The November natural gas contract climbed above $5/MMbtu in intraday trading on NYMEX before closing at $4.88/MMbtu, down 10.7¢ for the day. On the US spot market, however, gas at Henry Hub, La., climbed 29¢ to $3.35/MMbtu.
“The EIA expects the average Henry Hub spot natural gas price to increase from $3.85/Mcf to $5.10/Mcf in 2010,” said Pritchard Capital Partners. “EIA expects domestic natural gas production to continue to fall, with marketed production during the first half of 2010 to average about 1.8 bcfd lower than the second half of 2009. LNG imports are expected to increase to about 471 bcf in 2009, from 352 bcf in 2008, and rise to about 660 bcf in 2010.”
Pritchard Capital analysts added, “ExxonMobil Corp. management commented that there are signs of a rebound in global natural gas demand, but added ‘there were question marks over a recovery's sustainability.’ Repsol YPF SA’s chief executive, when speaking on LNG, claimed, ‘Up until 2013 there will be a situation of excess supply. Thereafter demand will exceed supply.’ The two comments were made less than 24 hr apart, and both pinpoint the uncertain outlook on natural gas and LNG held by different industry executives.”
In London, the November IPE contract for North Sea Brent crude increased 52¢ to $68.56/bbl. Gas oil for October gained $24.25 to $568.50/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $1.33 to $68.14/bbl on Oct. 6.
Contact Sam Fletcher at [email protected].
Rystad Energy.
