MARKET WATCH: Crude prices retreat in volatile trading

Jan. 10, 2008
Oil prices slipped in volatile trading Jan. 9, reducing gains from the previous session of the New York market as traders shrugged off an eighth consecutive week of declining inventories.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 10 -- Crude prices slipped in volatile trading Jan. 9, reducing gains from the previous session of the New York market as traders shrugged off an eighth consecutive week of declining inventories and worried instead about a possible economic recession that would diminish demand.

"The rally in crude oil continues to stumble due to concerns over a US recession," said analysts in the Houston office of Raymond James & Associates Inc. "However, several data points help support the underlying bullish story. Specifically, US crude inventories continue to fall. Crude inventories have now fallen 22 of the last 27 weeks. Also helping to put a floor underneath crude prices is news that China has announced a freeze on gasoline price increases. This price freeze should help ensure that Asian demand for crude and refined products will remain strong," the analysts said.

The Energy Information Administration said commercial US inventories plunged 6.8 million bbl to 282.8 million bbl in the week ended Jan. 4, well below the Wall Street consensus of a 1.1 million bbl decline. Gasoline stocks jumped by 5.3 million bbl to 213.1 million bbl during the same week, the single largest increase since December 2006. Distillate fuel inventories increased by 1.5 million bbl to 128.7 million bbl (OGJ Online, Jan. 9, 2008).

US crude stocks have fallen by 15 million bbl over the past 3 weeks to 290 million bbl, which is 25 million bbl below year-ago levels and well below the 5-year average, according to the latest monthly market report by KBC Process Technology Ltd. in England. Crude futures prices increased more than $10/bbl to just above the $100/bbl mark in December. But in the early trading days of January, prices moved in a $5/bbl band below this milestone.

"Further advances have been resisted by weak US economic data and forecasts of mild weather, both of which point to weaker US oil demand," said KBC analysts. "We expect these developments to lead to a period of falling oil prices during the first quarter. However, the Organization of Petroleum Exporting Countries seems likely to leave production unchanged at its meetings on Feb. 1 and Mar. 5. This will prevent any significant increase in discretionary oil stocks and lead to further bullish market activity from April on the run up to the US gasoline season."

In other news, Valero Energy Corp. said a power outage shut down all units at its 275,000 b/d refinery in Aruba on Jan. 8. A restart time has not yet been decided; however, company officials said Jan. 9 it took 2 weeks for the refinery to restart after a similar power outage in October. Valero said late last year it was looking to sell the refinery, which makes no finished fuels for US markets. Valero bought the refinery in 2004 from El Paso Corp.

Valero also said it will do maintenance on the coker at its 325,000 b/d Port Arthur, Tex., refinery to reduce cracks in the coke drums. The project is to begin in late January or early February and will take 25 days for each two-drum module. The coker has six drums, "so two will be worked on at a time while the other four remain in operation," said company officials. The maintenance will have only minimal effect on production, they said.

Energy prices
The February crude contract of benchmark US light, sweet crudes traded at $95.42-97.97/bbl Jan. 9 before closing at $95.67/bbl, down 66¢ for the day on the New York Mercantile Exchange. The March contract lost 85¢ to $95.23/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 66¢ to $95.68/bbl. The February heating oil contract dropped 2.29¢ to $2.61/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.84¢ to $2.44/gal.

The February natural gas contract continued to climb, however, up 13.2¢ to $8.10/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 33¢ to $7.91/MMbtu. "Natural gas continues to run and is up nearly 5% for the week," Raymond James analysts reported. However, they said, "We may be reaching a short-term peak for prices during the next week or so."

Meanwhile, EIA reported the withdrawal of 171 bcf of natural gas from US underground storage in the week ended Jan. 4. That exceeded the Wall Street consensus and compared with withdrawals of 86 bcf the prior week and 49 bcf during the same period last year. US gas storage is now 2.75 tcf, down by 122 bcf from a year ago, but 122 bcf above the 5-year average.

In London, the February IPE contract for North Sea Brent fell $1.17 to $94.37/bbl. Gas oil for January gained $5 to $844.25/tonne.

The average price of OPEC's basket of 12 benchmark crudes increased by 34¢ to $92.28/bbl on Jan. 9.

Contact Sam Fletcher at [email protected].