MARKET WATCH: Equity market rebound raises energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 4 -- Energy prices recovered Mar. 3 some of the losses from the previous trading session, following a rebound in equity markets from 12-year lows.

"Oil has been following closely the equity markets and will continue to do so until stock draws can start to rebalance risk," said Olivier Jakob at Petromatrix, Zug, Switzerland.

In Houston, however, analysts Raymond James & Associates Inc. said, "Several negative data points released [Mar. 3-4] point to a prolonged global recession: Australia's gross domestic product shrinks for the first time in 8 years, US auto sales fall 40% in February, and the Organization for Economic Cooperation and Development warns that the recession will be deeper than the International Monetary Fund has forecast. The small glimmer of hope comes from China, where the Purchasing Managers' Index improved in February for the third consecutive month, perhaps suggesting that manufacturing activity is in the early stage of revival."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "With the price of West Texas Intermediate still decoupled from the international market, [North Sea] Brent remains the leading crude benchmark. Prices for front-month Brent remained locked within a $7/bbl trading range in February, with an effective floor of $40/bbl. Once again this was despite a barrage of fresh bearish US and global macroeconomic news."

In other news, Shell Petroleum Development Co. shut in oil installations in the Niger Delta after explosions punctured in three places its 24-in. trans-Escravos oil pipeline. No word yet on the extent of damage, the timing of repairs, or the possible impact on crude exports from Nigeria (OGJ Online, Mar. 3, 2009).

Demand destruction
KBC analysts noted preliminary January oil sales data for the six main OECD markets showed a large decline of 1.8 million b/d from year-ago levels. "This is before revision by the US Department of Energy, which again slashed its provisional demand data, this time for December, by 800,000 b/d, making a mockery of their earlier weekly data releases that help (mis)inform market sentiment."

They said, "The global picture remained gloomy with Chinese crude imports falling back by 8% from a year earlier in January, as crude runs slumped. Sales growth in India was an anemic 2.3% reflecting weak demand in a slowing economy, while domestic oil products demand in South Korea fell by 2.4%."

Unless US oil stocks fall sharply prior to OPEC's Mar. 15 meeting, crude prices are likely to remain range-bound. "A new initiative by OPEC might then be required to avoid disappointing the market, possibly leading to a limited sell-off. Platitudes about the need first for further compliance could be counter-productive, taken as indicative of dissent," KBC analysts said.

"Given the lags in the system, a decision to make a further cutback, possibly of around 1 million b/d, would have little material impact on consumer oil stocks by the end of the second quarter but could influence market psychology," they said.

US inventories
The Energy Information Administration reported Mar. 4 commercial US crude inventories declined by 700,000 bbl to 350.6 million bbl in the week ended Feb. 27. That loss exactly matched the previous week's gain and was exactly opposite the Wall Street consensus for another 700,000 bbl build. Crude inventories remain above average for this time of year.

Gasoline stocks increased by 200,000 bbl to 215.5 million bbl in the same period vs. an expected draw of 3.3 million bbl last week. Distillate fuel inventories gained 1.7 million bbl to 143.3 million bbl, surpassing the consensus for a 900,000 bbl increase.

Raymond James analysts noted, "This week's consensus estimates on crude, gasoline, and distillates are exactly the same as last week's reported inventory increases and decreases. Coincidence, or is the market completely clueless on petroleum demand?"

Imports of crude into the US increased by 259,000 b/d to 9 million b/d during the latest period. The input of crude into the US refining system was up by 409,000 b/d to 14.3 million b/d, with refineries operating at 83.1% capacity. Gasoline production rose to 9 million b/d, while distillate fuel production decreased to 4.1 million b/d.

Jakob at Petromatrix said, "While the crude oil stocks figures are not yet showing a picture of strong draws, they are neither showing a continuation of the build and this despite a low crude oil demand environment due to refineries maintenance schedule."

KBC analysts said recent EIA reports show a "pronounced reduction" in crude imports. "This is further evidence that the Organization of Petroleum Exporting Countries' cutbacks are now impacting on consumer markets. Latest reports for February indicate that the oil cartel has taken 3.4 million b/d of supply off the market and achieved a quite high compliance level of 80%."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, "Refined product inventories (gasoline plus distillate plus jet fuel) increased 3.1 million bbl (0.8%) last week, due primarily to lower distillate and jet fuel demand." However, he said, "Gasoline demand of 9.2 million b/d was the highest weekly total since August 2008."

Rousseau said, "Gasoline fundamentals should remain a positive for refiners over the next month if refiners continue to operate at reduced rates. However, we remain concerned that gasoline supply will rise (both production and imports) to take advantage of the good margins, especially after refiner maintenance slows in April."

Energy prices
The April contract for benchmark US light, sweet crudes rebounded by $1.50 to $41.65/bbl Mar. 3 on the New York Mercantile Exchange. The May contract increased $1.46 to $43.91/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.50 to $41.65/bbl. Heating oil for April increased 2.84¢ to $1.18/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) climbed 3.32¢ to $1.32/gal.

Natural gas for the same month rebounded by 13¢ to $4.28/MMbtu on NYMEX—"driven by temperatures well below normal in the key heating regions and a colder 8-14 day outlook, which will generate greater than normal heating demand," said analysts at Pritchard Capital Partners LLC, New Orleans. On the US spot market, gas at Henry Hub, La., continued to climb, up 3¢ to $4.43/MMbtu.

In London, the April IPE contract for North Sea Brent crude gained $1.49 to $43.70/bbl. Gas oil for March continued to decline, however, down $4.75 to $361.25/tonne.

The average price for OPEC's basket of 12 reference crudes dropped $1.21 to $41.77/bbl on Mar. 3.

Contact Sam Fletcher at [email protected].