MARKET WATCH: Energy prices decline despite inventory reductions

Sept. 10, 2010
Prices rallied in early trading Sept. 9 following a government report of a decline in US crude inventories, but the front-month oil contract was down 0.6% at the close of the New York market as traders recognized increases in other categories put total stocks of crude and products at a record 1.14 billion bbl last week.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 10 -- Prices rallied in early trading Sept. 9 following a government report of a decline in US crude inventories, but the front-month oil contract was down 0.6% at the close of the New York market as traders recognized increases in other categories put total stocks of crude and products at a record 1.14 billion bbl last week.

The Energy Information Administration said commercial US crude inventories dropped 1.9 million bbl to 359.9 million bbl in the week ended Sept. 3, while gasoline stocks decreased 200,000 bbl to 225.2 million bbl. Distillate fuel inventories fell 400,000 bbl to 174.8 million bbl (OGJ Online, Sept. 9, 2010).

The price of natural gas continued to fall, down 1.2% after EIA reported a 58 bcf increase in US underground storage to 3.16 tcf. “With milder weather ahead, we expect to increasingly see above-normal storage injections. However, with January trading above $4.50, the October-January spread would continue to provide incentive for storage buying at the current level,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

Olivier Jakob at Petromatrix, Zug, Switzerland reported, “The US picture is not changed from previous weeks. US gasoline stocks are not drawing, and if there was a marginal stock draw in distillates it was in low-sulfur diesel not in heating oil. On the 4-week average, US oil demand is up 140,000 b/d vs. last year (0.7%) while gross inputs into refineries are 400,000 b/d higher.” He said, “One thing that stands out is the large drop in crude oil imports (down 800,000 b/d in the week) but there could be some holiday noise in that number.”

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “Overall, crude oil is in the middle of the $70-80/bbl range it’s been trading in the last few months. The market seems stuck, however, and appears to be desperately looking for positive news in terms of oil demand or signs of an improving economic outlook. As a result, better data will be seized on and likely have a disproportionate effect on prices, whereas middling to poor data is priced in already.”

In other news, Enbridge Energy Partners LP shut in a 670,000 b/d crude pipeline from Superior, Wis., to Griffith, Ind., the afternoon of Sept. 9 due to a leak in suburban Chicago. The leak has stopped and repairs are underway, officials reported, but there has been no indication when the pipeline will reopen.

“It is not the first time that there is a leak on a pipeline, and in the past it never took too long for the repairs to be done,” Jakob said. “But the Deepwater Horizon incident has added an additional risk premium as the Environmental Protection Agency is more under the spotlight, and this brings the risk that the downtimes for repairs are more lengthy than in the past.”

He pointed out, “There is plenty of crude oil stocks in the US and in the Midwest, but with this incident it will be much harder to justify West Texas Intermediate trading at a deep discount [to North Sea Brent] and to have the prompt spread in a mega-contango that is above storage economics. Traders are not taking a wait-and-see attitude on their WTI-Brent or WTI spread positions, and adjustment to those relative value positions should dominate trading today as the latest pipeline incident was announced in after-market hours. The breakdown in line 6A comes after the end-of-July leak on line 6B, hence the total line capacity off-line from Canada now adds up to 840,000 b/d and that will be problematic and a game-changer for the relative-values if line 6A is not quickly brought back to operation.”

Energy prices
The October contract for benchmark US light, sweet crudes lost 42¢ to $74.25/bbl Sept. 9 on the New York Mercantile Exchange. The November contract dropped 58¢ to $75.79/bbl. On the US spot market, WTI at Cushing, Okla., was down 42¢ to $74.25/bbl. Heating oil for October delivery declined 1.33¢ to $2.07/ gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.4¢ but closed virtually unchanged at a rounded $1.94/gal.

The October natural gas contract fell 4.6¢ to $3.77/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 3.5¢ to $3.79/MMbtu.

In London, the October IPE contract for North Sea Brent crude dropped 70¢ to $77.47/bbl. Gas oil for September gained $2.25 to $662.75/tonne.

No update of the average price for OPEC’s basket of 12 reference crudes was available Sept. 10 because the Secretariat in Vienna was closed for Eid Al-Fitr—a 3-day Islamic celebration at the end of the month-long fast of Ramadan.

All OPEC members have something additional to celebrate. On Sept. 10, 1960, officials from major oil producing countries opened a conference in Baghdad that culminated 4 days later with the creation of OPEC by its five founding members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.

Contact Sam Fletcher at [email protected].