MARKET WATCH: Crude price climbs; gas declines

Nov. 18, 2009
Crude prices continued climbing Nov. 17 despite a strengthening US dollar, but the front-month natural gas contract gave up some of its gain from the previous session of the New York market on weaker US manufacturing and mixed weather forecasts.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 18 -- Crude prices continued climbing Nov. 17 despite a strengthening US dollar, but the front-month natural gas contract gave up some of its gain from the previous session of the New York market on weaker US manufacturing and mixed weather forecasts.

Some analysts attributed the rise in crude prices to trader’s anticipation of a mild decline in fuel inventories. After the close of regular trading Nov. 17 in New York, the American Petroleum Institute issued a bullish report of a 4.9 million bbl draw on US crude stocks.

However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “One would have to suffer from serious amnesia to buy and hold on [API] numbers that are a pure reflection of the temporary discharge disruptions linked to Tropical Storm Ida and that will be reversed in the next two reports.”

Jakob noted the storm disrupted oil imports through the Louisiana Offshore Oil Port (LOOP) during 5 days of the period covered by the report. “That will amount to at least 4 million bbl of discharge delays while production shut-ins should have accounted for another 1.6 million bbl of lost supplies,” he said. “Most of the crude draws reported by the API were in the US Gulf of Mexico (down 8 million bbl), and while we have to respect that automatic trading programs will buy on any reported stock draws, we need to keep in mind as well that these reported draws linked to discharge disruptions are very likely to start being reversed in next week’s report, which will be published in front of a very long weekend.” The New York Mercantile Exchange will be closed Nov. 26 for the US Thanksgiving holiday.

US inventories
The Energy Information Administration reported Nov. 18 commercial US crude inventories declined 900,000 bbl to 336.8 million bbl in the week ended Nov. 13, still slightly above average for the time of year. The consensus among Wall Street analysts was for a 300,000 bbl increase. Gasoline stocks dropped 1.7 million bbl to 209.1 million bbl in the same period, also above average. Finished gasoline inventories increased while blending components decreased. Distillate fuel inventories also declined, down 300,000 bbl to 167.4 million bbl compared with expectations of a 900,000 bbl decrease. Distillate stocks also are above average for this period.

Imports of crude into the US dipped by 77,000 b/d to 8.6 million b/d. In the 4-week period through Nov. 13, US imports of crude averaged 8.6 million b/d, down 1.5 million b/d from the comparable period a year ago.

The input of crude into US refineries declined 31,000 b/d to 13.8 million b/d, with units operating at 79.4% of capacity. Gasoline production increased to 9.1 million b/d while distillate fuel production decreased to 4 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, “Refiners continued to reduce utilization rates last week due to very weak refining margins,…and coupled with an uptick to demand, refined production inventories (gasoline plus distillate plus jet fuel) fell 2.9 million bbl (0.7%).”

EIA regional data “showed the East Coast reacting to weak refining margins by lower utilization rates to below 71% and reducing weekly gasoline imports to their lowest level in over 5 years (435,000 b/d vs. the 2009 year-to-date average of 846,000 b/d),” Rousseau said. “This resulted in falling gasoline inventories last week, and we expect this trend to continue until refining margins improve in the region.” The last quarter of 2009 “should be the worst quarter of the year for refiner earnings,” he said.

In Houston, analysts with Raymond James & Associates Inc. said the Nov. 17 crude closing also got a boost from “an overall rising market, which gained for the third straight day after a better-than-expected US retail sales jump.”

Although the front-month natural gas contract gave back some of its previous gains in the New York market, analysts at Pritchard Capital Partners LLC in New Orleans said, “The trading range was less volatile then previous trading. The biggest problem for natural gas is growing concerns that there is a huge and growing glut…and many exploration and production companies raising production adds to that glut.”

They noted an announcement by Nexen Inc. that it expects to boost its production from the Horn River basin in British Columbia tenfold (from 15 MMcfd to 150-200 MMcfd) in the next 2 years. That “highlights the abundance of natural gas in North America,” said Pritchard Capital Partners. “Another 150-185 MMcfd of production is not a huge amount, but this type of announcement is occurring across every major natural gas play in North America. The best ally of natural gas is a higher oil price as the higher oil goes, the more attractive natural gas becomes as an alternative.”

Floating storage
Meanwhile, Jakob said, “Oil economics used to be that in a period of low demand, refineries would run until the onshore stocks would be filled up, then the contango would pressure the refinery margins, which would then limit refinery production until stocks start to draw. However, the total collapse in trade following the credit crisis at the end of 2008 and the zero interest rate policy of the US Federal Reserve has brought an additional and almost indefinite level of storage tanks through the use of ships as floating stocks. This means that refineries have been producing way over what should have been the balancing economics.”

He said, “It is difficult to have a precise number for the amount of oil in floating storage, but the risk associated with it is increasing significantly. According to the International Energy Agency, floating stocks at the end of October were of 60 million bbl in crude oil and 80 million bbl in distillates. According to the Organization of Petroleum Exporting Countries, the numbers are 40 million bbl in crude and 90 million bbl in distillates. Then ICAP [Shipping International Ltd.] has been quoting 90 million bbl for the end of November and 97 million bbl for the end of December in distillates.”

Jakob said, “This means that floating stocks of distillates have been multiplied by five over the last 9 months. To put things in perspective, if the current rate of increase in distillate floating stocks continues, we would have at the end of March 2010 more distillate stocks on water then we had in March 2008 in the total onshore USA.”

Storage is always part of the demand equation, but floating stocks are more short-time oriented than normal fixed-tank stocks. “For that reason, an adjustment in forward demand should be made for this amount of oil sitting idle at anchor, which will have to come out at one stage in the short to medium term,” Jakob said.

He explained, “At a 40% processing yield, it has taken in 2009 about 250 million bbl of crude oil to produce the 100 million bbl of distillates that went into floating storage. Add to it about 50 million bbl of actual crude in floating storage, and that makes…300 million bbl of crude oil equivalent that will come back to the market in the short to medium term. On an annualized basis, this amounts to about 800,000 b/d.”

Jakob noted, “According to the IEA, demand next year will be higher by 1.4 million b/d. According to OPEC, demand will be higher by 800,000 b/d. Hence, the current stocks afloat should meet most of next year’s demand increase, which would leave onshore stocks basically unchanged from the current record highs, while the supply and demand equation will still have to deal with some increase in non-OPEC and noncore OPEC crude production.”

Energy prices
The December contract for benchmark US light, sweet crudes advanced 24¢ to $79.14/bbl Nov. 17 on NYMEX. The January contract increased 19¢ to $79.72/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 24¢ to $79.14/bbl. Heating oil for December delivery gained 2.65¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 1.81¢ to $2/gal.

The December natural gas contract dropped 8.4¢ to $4.53/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 53.5¢ to $3.43/MMbtu as it continued to recoup from an earlier loss.

In London, the January IPE contract for North Sea Brent crude was up 21¢ to $78.97/bbl. Gas oil for December gained $2.75 to $631.25/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 48¢ to $76.97/bbl on Nov. 17.

Contact Sam Fletcher at [email protected].