MARKET WATCH: Crude price rallies above $80/bbl

Nov. 5, 2009
Oil prices continued a 3-day rally Nov. 4 with crude closing above $80/bbl in the New York market following bigger-than-expected drops in US inventories of crude and gasoline and a weaker dollar after the Federal Reserve said it would maintain its current interest rate policy for an extended period.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 5 -- Oil prices continued a 3-day rally Nov. 4 with crude closing above $80/bbl in the New York market following bigger-than-expected drops in US inventories of crude and gasoline and a weaker dollar after the Federal Reserve said it would maintain its current interest rate policy for an extended period.

“The comments from the Fed erased approximately half of last week’s gain in the US dollar; the US Dollar Index closed down 0.75%,” said analysts at Pritchard Capital Partners in New Orleans.

Meanwhile, the Energy Information Administration announced commercial inventories of US benchmark crude fell 4 million bbl to 335.9 million bbl in the week ended Oct. 30. Wall Street analysts were expecting a 1.5 million bbl increase, while the American Petroleum Institute earlier issued a “bullish” report of a 1 million bbl draw in crude. EIA said gasoline stocks declined 300,000 bbl to 208.3 million bbl. Distillate fuel inventories decreased by 400,000 bbl to 167.4 million bbl (OGJ Online, Nov. 4, 2009).

The large decline in crude stocks was “the largest surprise,” said Pritchard Capital Partners. “A 764,000 bbl drop in crude imports can explain approximately half of the crude draw, but this is the third consecutive crude products inventory report with positive crude implications. Should dollar weakness persist, crude could test the $82[/bbl] year high. If it breaks $82, the next level of resistance seen by some market technicians is $85.”

The reduction of crude stocks was “mainly in the US gulf on the back of relatively low imports,” said Olivier Jakob at Petromatrix, Zug, Switzerland. What’s more, he said, “This calendar week there has been some closure of Mexican ports due to bad weather; hence there is a risk of seeing continued lower imports into the next two reports.”

The latest EIA inventory of crude and refined products “marks now the fourth consecutive week of overall stock draws in the US, but overall stocks of crude and the main clean products are still 87 million bbl above the levels of last year and at multiyear high for the season,” Jakob said. “With the higher oil prices and return to peace, we would expect to see a rush to bring the Nigerian crude capacity back on line.”

Overall, Jakob said, “The Fed is not pointing at any strong demand recovery, and the US oil statistics are saying the same thing. US demand for petroleum product has been very stable for the last 5 months, and while stability is better than continued erosion, it is not yet showing any sign of rebound. October US oil demand [was] lower than last year by 900,000 b/d, lower than 2007 by 1.7 million b/d, and at the lowest demand level for a month of October since 1995.”

Natural gas
The front-month natural gas price continued to fall Nov. 4 in the New York market ahead of the EIA’s weekly assessment of gas in storage. EIA reported the injection of 29 bcf of natural gas into US underground storage in the week ended Oct. 30, down from the 31 bcf that was expected. This brought gas in storage to 3.788 tcf, with a total capacity of 3.9 tcf. Gas stocks are now 379 bcf higher than last year at this time and 414 bcf above the 5-year average.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Since reaching $6 on Oct. 21, the December natural gas contract has sold off hard and is now trading [near] $4.70 after falling another 4% [on Nov. 4]. While it will be hard to discern any valuable fundamental information from today's EIA inventory number given the physical constraints of near-full storage, the prospects of a winter gas rally into an $8 or $9/Mcf environment are looking bleaker.”

Meanwhile, Pritchard Capital analysts reported both Devon Energy Corp. and XTO Energy Inc. announced in their earnings releases they have begun to hedge their gas production at current prices. “Devon added to hedge positions for the fourth quarter and now have hedged 1.1 bcfd at an average price of $5.65/Mcf, or 45% of their fourth quarter production. Devon has seldom hedged current production in the past,” the analysts said. “XTO said that it had secured 250 bcfd of 2011 hedges at $7.02/Mcf, and XTO management see now as an opportune time to capture hedges.”

Only a day earlier, Chesapeake Energy Corp. said it elected not to hedge future gas production at current prices. Company officials said they believe higher prices are ahead, and the ‘right time’ to hedge has not arrived (OGJ Online, Nov. 4, 2009).

“The comments made by all three E&Ps highlight the divergent views surrounding the price of natural gas,” said Pritchard Capital analysts.

Energy prices
The December contract for benchmark US sweet, light crudes closed Nov. 4 at $80.40/bbl, up 80¢ for the day after touching an intraday high of $81.06/bbl on the New York Mercantile Exchange. The January contract increased 81¢ to $81.07/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 80¢ to $80.40/bbl. Heating oil for December delivery gained 1.69¢ to $2.09/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month moved up 1.23¢ to $2.01/gal.

The December natural gas contract fell 19.7¢ to $4.73/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 6.5¢ to $4.45/MMbtu.

In London, the December IPE contract for North Sea Brent crude increased 78¢ to $78.99/bbl. Gas oil for November escalated by $15.75 to $641/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes jumped by $2.07 to $77.60/bbl on Nov. 4.

Contact Sam Fletcher at [email protected].