MARKET WATCH: Crude price rebounds; gas price continues to slip

Sept. 9, 2010
Crude prices rebounded 0.8% on Sept. 8, wiping out the previous session’s losses in New York as the equity market improved and the dollar weakened, but the front-month natural gas contract continued to decline, down 1%.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 9 -- Crude prices rebounded 0.8% on Sept. 8, wiping out the previous session’s losses in New York as the equity market improved and the dollar weakened, but the front-month natural gas contract continued to decline, down 1%.

“US equities rose slightly after fears of a European debt crisis were eased following improved demand for issuances of Portuguese and Polish sovereign debt,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks took their cues from strengthening oil prices and increased confidence in the broader market.” The broader market and crude prices were up slightly in early trading Sept. 9 but natural gas was flat, they said.

“West Texas Intermediate traded again in a small range and continues to lack any clear directional trend,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “What is striking is the relative small trading range that has characterized the crude futures market for the last few months.” On an absolute dollar-per-barrel basis, he said, “The trading range is still large compared to history, but on a percent basis, the high-low yearly trading range is at the lowest level since 1995. In our opinion, this is simply because the global oil markets are in a steady equilibrium, and this is not allowing the development of any major directional trading themes.”

Jakob acknowledged, “Even in markets that are globally in equilibrium there can be some limited geographical or product imbalances, but they are not structural and in an environment of spare production capacity downstream or upstream the local imbalances do not develop in a sustainable global imbalance.”

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “Although crude oil pushed slightly higher yesterday, we still see it as range-bound with WTI front-month support at $72.95 and $71.80, while resistance is at $75.20 and $75.78.”

In other news, Jakob said, “The overnight buzz is on what’s happening in the Chinese commodity markets, with all sorts of rumors about investigations from regulators forcing heavy local liquidation in some commodities.”

US inventories
The Energy Information Administration said Sept. 9 commercial US crude inventories dropped 1.9 million bbl to 359.9 million bbl in the week ended Sept. 3, counter to Wall Street’s consensus for a 1 million bbl increase. Gasoline stocks decreased 200,000 bbl to 225.2 million bbl, short of market expectations of a 1 million bbl decline; finished gasoline inventories increased while blending components inventories decreased. Distillate fuel inventories fell 400,000 bbl to 174.8 million bbl vs. a consensus for a 700,000 bbl increase.

The American Petroleum Institute earlier reported a bullish 7.3 million bbl drop in crude stocks to 354.2 million bbl in the same period, with gasoline inventories up 654,000 bbl to 226.3 million bbl. Distillate stocks were up 1.3 million bbl to 169 million bbl, API said.

Imports of crude into the US fell 794,000 b/d to 8.9 million b/d last week, EIA reported. In the 4 weeks through Sept. 3, the US imported an average 9.5 million b/d, up 500,000 b/d from the comparable 4-week period in 2009.

The input of crude into US refineries increased by 90,000 b/d to 14.9 million b/d with units operating at 88.2%, said EIA. Gasoline production increased to 9.5 million b/d, while distillate fuel production was relatively unchanged at 4.3 million b/d.

EIA reported the injection of 58 bcf of natural gas into US underground storage in the week ended Sept. 3, just above the consensus estimate of 57 bcf. That brought working gas in storage to 3.16 tcf, down 218 bcf from a year ago and 166 bcf above the 5-year average.

Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, “Although inventory levels remain very high, the EIA reported an overall light products (gasoline plus distillate plus jet fuel) stock decline for the second consecutive week, and we expect this trend to continue over the next month as refinery utilization rates and production falls due to fall maintenance.”

Rousseau estimated the average US refining margin increased from $9.78/bbl to $10/bbl over the past week vs. an average $12/bbl in 2008 and $9/bbl in 2009. Gasoline inventories are 15% ahead of their 5-year average for this calendar week while distillate stocks are 24% ahead of their 5-year mean,” he said.

He said, “After a strong second quarter, refining margins declined sharply in August due to rising supply and lackluster demand. As a result of this weakness, we expect some refiners to lower production levels and coupled with the upcoming fall turnaround season (which started in early September), lower supply should begin to reduce the current refined product inventory overhang in September-October, a potential near-term positive for refining margins and stocks.”

Rousseau estimated the price differential between US benchmark WTI and Mexico’s Maya crude averaged $8/bbl last week, below the year-to-date average of $9/bbl. That compares with average spreads of $5/bbl in 2009 and $16/bbl in 2008.

Most of the large crude stock draw reported by API was in Petroleum Administration for Defense District (PADD) 2 (the Midwest), outside of Cushing, Okla., while stocks in Cushing were unchanged, said Jakob. “We are always a bit cautious on holiday reports that show unexpected wild data swings and given that the API now has crude oil stocks in PADD 2 almost 7 million bbl below the Department of Energy [via EIA], we will hesitate to trade on that number until a confirmation from the DOE,” he said prior to issuance of the EIA report.

The latest MasterCard Spending Pulse report shows US gasoline sales at the pump in the week preceding the Labor Day weekend were at the lowest level since the week of Feb. 12. “In other words, sales of gasoline were at the lowest levels since ‘Snowmageddon’ had shut down most of the Northeast in the great blizzard of 2010,” Jakob noted. “However, on the 4-week average, sales were still 1.1% higher than a year ago.”

De Wet observed, “Given that seasonal demand for gasoline is supposed to be high, a buildup in gasoline inventory may indicate demand weakness creeping in.”

OPEC’s outlook
Estimate of world economic growth in 2010 remained unchanged at 3.9% in the latest monthly report by the Organization of Petroleum Exporting Countries, but officials slightly revised down their 2011 estimate to 3.6%. “The imbalance in global growth has intensified with a deceleration becoming apparent in most [member nations] of the Organization for Economic Cooperation and Development, while developing countries continue to expand. Growth in the US and Japan have been revised down due to the diminishing impact of stimulus packages. US growth stands at 2.6% in 2010 and 2.3% in 2011, while Japan is expected to grow by 2.5% and 1.3%, respectively,” OPEC said.

OPEC officials said the eurozone “gained surprising momentum” in the second quarter of this year and is forecast to grow at 1.2% in 2010 and 1% in 2011. “Supported by domestic demand, India is expected to expand at 8.2% in 2010 and 7.7% in 2011. China seems to be successfully cooling down the economy with the forecast for 2010 unchanged at 9.5%, while 2011 has been lowered slightly to 8.6%,” OPEC reported.

OPEC’s estimate of world oil demand growth in 2010 remained broadly unchanged at 1 million b/d. “Global oil demand was higher than expected in the first half of the year, supported by stimulus packages in key consuming countries. With these winding down, demand in the second half is expected to move lower. In 2011, world oil demand growth is expected to continue at the current level of 1 million b/d, unchanged from the last assessment. Non-OECD countries will remain the key contributors to demand growth, led by China, India, the Middle East, and Latin America,” said OPEC officials.

Non-OPEC oil supply in 2010 is expected to grow by 900,000 b/d over the previous year, following an upward revision of 130,000 b/d since the last assessment. In 2011, non-OPEC oil supply is forecast to grow by 400,000 b/d over the previous year. OPEC NGLs and unconventionals are expected to average 4.8 million b/d in 2010 and 5.3 million b/d in 2011, representing growth of 500,000 b/d for both years. In August, OPEC crude oil production stood at 29.15 million b/d, representing “a marginal decline” from the previous month.

Demand for OPEC crude in 2010 was revised down by 100,000 b/d from the previous report to 28.6 million b/d, representing a decline of 300,000 b/d compared to last year. Demand for OPEC crude in 2011 was revised down by 100,000 b/d to average 28.8 million b/d.

Energy prices
The October contract for benchmark US sweet, light crudes gained 58¢ to $74.67/bbl Sept. 8 on the New York Mercantile Exchange. The November contract increased 52¢ to $76.37/bbl. On the US spot market, WTI at Cushing was up 58¢ to $74.67/bbl. Heating oil for October delivery rose 0.74¢ to $2.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 0.65¢ to $1.94/gal.

The October natural gas contract dropped 3.8¢ to $3.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ but closed virtually unchanged at a rounded $3.82/MMbtu.

In London, the October IPE contract for North Sea Brent crude gained 43¢ to $78.17/bbl, still at a strong premium over WTI. Gas oil for September advanced $14 to $660.50/tonne.

The average price for OPEC’s basket of 12 reference crudes jumped up $1.01 to $74.04/bbl.

Contact Sam Fletcher at [email protected].