After trading over a fairly tight range for more than 4 months on the New York Mercantile Exchange, the front-month crude contract finally broke through to the upside only to trade within an even tighter range of $79-80/bbl through 19 days in late October and early November.
There was no explosive breakout—"just a subtle adjustment of the range, and market dynamics have returned to being a fairly relaxed chess game," said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London. "The immediate floor to prices has been moving up, beyond $70/bbl and perhaps as high as $75/bbl, and the downside below that has become more protected by a continuing flow of reasonably supportive macroeconomic and global oil data," he said.
Energy prices fell Nov. 12 with benchmark US light, sweet crudes down $2.34 to $76.94/bbl on NYMEX as traders focused on a US Energy Information Administration report of a larger than expected increase in crude inventories during the previous week. Prices continued to decline Nov. 13 as low as $75.57/bbl before closing at $76.35/bbl.
Crude prices rebounded in early trading Nov. 16 on news China's economy—second only to the US—beat expectations and grew at an annual rate of 4.8% in the third quarter, said analysts in the Houston office of Raymond James & Associates Inc. China's power consumption was reported up 16% from 2008. A declining dollar and growing speculation that the Organization of Petroleum Exporting Countries will leave production unchanged at its December meeting helped boost the price of crude Nov. 16.
EIA reported commercial US benchmark crude inventories increased 1.8 million bbl to 337.7 million bbl in the week ended Nov. 6, the latest period at press time. That surpassed Wall Street's consensus of a 1 million bbl gain but was well below the American Petroleum Institute's more-bearish report of a 3.2 million bbl build. Gasoline stocks for the same week were up 2.5 million bbl to 210.8 million, while analysts expected a 400,000 bbl draw. Distillate fuel inventories increased 300,000 bbl to 167.7 million bbl, also above average and in the opposite direction of analysts' anticipation of a 700,000 bbl decrease.
Refinery runs
Imports of crude into the US in that period were up 530,000 b/d to 8.7 million b/d. In the 4 weeks through Nov. 6, crude imports averaged 8.6 million b/d, down 1.5 million b/d from the comparable period in 2008. Nonetheless, the input of crude into US refineries dropped 145,000 b/d to 13.8 million b/d during the week with units operating at 79.9% of capacity as refiners continued to reduce utilization rates due to weak refining margins. Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said it was the first time in years refinery utilization dropped below 80% "absent hurricane-related shutdowns." He said, "With refining margins near their lowest level of 2009, we expect this lower supply trend to continue for the remainder of the quarter. The fourth quarter should be the worst quarter of the year for refiner earnings, in our view."
Rousseau added, "EIA regional data showed a continued trend of rising West Coast gasoline inventories, which have increased 9% over the past 4 weeks. Surprisingly, despite very weak refining margins, utilization rates increased in the Rocky Mountains (from 81% to 86%) and West Coast (from 85% to 87%) regions last week, which could raise inventory levels further in those markets in the coming weeks."
Horsnell said Nov. 12, "Plenty of support seems to have built up beneath prices to reduce the sustainability of any sharper moves to the downside. There has also been a degree of increased control over the upside to prices, further compressing the recent trading range. In our view, since the break out above $75/bbl occurred, the nature of the selling pressure at the top of the range…appears less motivated by macro shorts and technicals, and now seems to contain a greater component of reference towards the policy of, and signals from, major oil producers. Those signals are rarely as frequent or quite as subtle as the market often imagines, but the general message has emerged that an immediate charge towards $90/bbl is likely to be overtly damped. In the absence of clearer indications, the market is currently trading as if somewhere around $80/bbl is the safest ceiling, and as if too fast a progression beyond that might attract a more overt damping strategy from producers."
(Online Nov. 16, 2009; author's e-mail: [email protected])
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