MARKET WATCH: Crude price falls on economic, pipeline news

Sept. 16, 2010
Price of the front-month crude contract fell 1.2% Aug. 15 on the New York market as traders focused on economic news and pending restoration of Enbridge Energy Partners LP’s 670,000 b/d 6A crude pipeline, which was shut-in Sept. 9 due to a leak.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 16 -- Price of the front-month crude contract fell 1.2% Aug. 15 on the New York market as traders focused on economic news and pending restoration of Enbridge Energy Partners LP’s 670,000 b/d 6A crude pipeline, which was shut-in Sept. 9 due to a leak (OGJ Online, Sept. 15, 2010).

A Sept. 15 report from the Federal Reserve Bank of New York delivered little reason for optimism about the economy: A survey of New York manufacturers indicated conditions remain mostly unchanged.

And the pipeline restart promised to bring interrupted supply back to the market.

“Enbridge has finished the repairs on its line 6A, and it does seem that we are heading for a weekend restart if not one already by tomorrow,” Olivier Jakob at Petromatrix in Zug, Switzerland, reported Sept. 16. “The whole incident will have resulted in less than 10 days of interruption to supplies (4.5 million bbl), and if the front West Texas Intermediate spreads are not yet back to preincident contango level, the WTI flat price is back to the range it was trading in before the interruption. WTI will have to find something new to retest the recent highs at $78/bbl.”

Downward price pressures such as those overshadowed a report by the Energy Information Administration that commercial US crude inventories fell 2.5 million bbl to 357.4 million bbl in the week ended Sept. 10. Gasoline stocks dropped 700,000 bbl to 224.5 million bbl, and distillate inventories declined 300,000 bbl to 174.5 million bbl.

Natural gas prices continued climbing Aug. 15, again led by the spot cash market. On Aug. 16, EIA reported the injection of 103 bcf of natural gas into US underground storage in the week ended Sept. 10, well above the Wall Street consensus for a 92 bcf injection. That boosted working gas in storage to 3.267 tcf, down 182 bcf from the comparable week last year but 192 bcf above the 5-year average.

Jakob said, “Stocks of gasoline were only marginally reduced and remain therefore at multiyear highs for the season while distillates had a stock draw mostly in high-sulfur heating oil. The dilemma for US refiners remains unchanged: how to produce distillates for the export market without producing gasoline for the inland market where ethanol is taking year after year a greater share of the supply equation. ”

He said, “Overall US demand on the 4-week average is starting to suffer from the loss of the base effect of the weak demand in the first half of 2009. Total US demand is only 131,000 b/d higher than last year (up 0.7%) with most of the increase being in distillates (up 395,000 b/d), a number which likely includes some export barrels. Refinery runs are unchanged vs. last year but crude oil supply is higher by about 500,000 b/d.”

Stocks of crude at Cushing, Okla., were slightly lower in the latest report “and could be lower in the next report due to the pipeline disruption,” Jakob said. However, he added, “They are still at record highs for the season, and this will not change even if the pipeline interruption forces a stock draw, given that last year they were also drawing during September and October to make room for a transfer of stocks from the US Gulf Coast to the US Midwest between November and December.”

With refining capacity reduced for maintenance and pipeline interruptions, imports of Canadian crude for the US Midwest are “considerably lower,” with the crude backing up in Canada. But with the large price discount for Western Canada Select crude and the current contango on WTI, Jakob said, “We would expect the flows from Canada to the US Midwest to quickly rebound once the pipeline capacity is back.”

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “The US still has a large crude and product stock overhang. This overhang has been particularly acute in distillate inventories. At the same time, inventories at Cushing remain near all-time highs. However, since May last year, there has been a steady normalization in crude and product inventories in the US.”

Days-forward cover for gasoline has declined steadily since January. However, De Wet said, “The decline bottomed early in July at 23.4 days and is rising again. Current days-forward cover for gasoline inventories stands at 24.2 days. The 5-year average cover is 22.7 days. The inventory levels are closing in on levels observed during the same month in 2008 and 2009, at around 23 days but still well off levels seen in 2007 (around 21 days). However, seasonally we are looking at the end of high gasoline demand, and from September until February gasoline days-forward cover tends to rise in the US. While the market has found support from seasonal gasoline demand, this may end in coming weeks.”

He expects increased demand for distillate products in the near term. “On days-forward cover, we have seen a steady decrease in distillate inventory, but the stock overhang remains large. Days forward cover peaked at 50.5 days in October 2009 and declined to 38.6 days at the start of June. Since then, inventory levels have been rising towards 45.5 days as seasonal demand tails off (5-year average is 34.2 days). We expect that any build in distillate stocks will receive greater attention as in August,” De Wet reported.

He said, “Overall, without substantial dollar weakness, we believe WTI front-month [contract] may find it difficult to sustain rallies above $80/bbl. This level has been the resistance level in the $70-80 range that oil has traded in since April.”

Meanwhile, Tropical Storm Karl is expected to increase to hurricane strength after entering the Bay of Campeche. It is forecast to make landfall near Vera Cruz on Sept. 18. “The storm is not expected to move up to the US [sector of the Gulf of Mexico] and will likely only result in some delays to the Mexican crude oil exports. We do not see Karl strong enough to replace the Enbridge premium,” Jakob said.

Energy prices
The October contract for benchmark US sweet, light crudes traded as low as $74.66/bbl Sept. 15 on the New York Mercantile Exchange before closing at $76.02/bbl, down 78¢ for the day. The November contract dropped 71¢ to $77.12/bbl. On the US spot market, WTI at Cushing was down 78¢ to $76.02/bbl. Heating oil for October delivery inched up 0.38¢ to close essentially unchanged at a rounded $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 0.65¢ to $1.96/gal.

The October contract for natural gas increased 2.9¢ to $4/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 5¢ to $4.06/MMbtu.

In London, the October IPE contract for North Sea Brent was down 25¢ to $78.91/bbl. Gas oil for October lost $3.75 to $673.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 17¢ to $75.37/bbl.

Contact Sam Fletcher at [email protected].