MARKET WATCH: Crude prices dip as inventories rise
Sam Fletcher
OGJ Senior Writer
HOUSTON, Mar. 26 -- The front-month crude contract dropped Mar. 25 from its highest level in 3 months on the New York Mercantile Exchange following a report that commercial US crude inventories jumped to the highest point since July 1993.
The Energy Information Administration said commercial US crude inventories escalated 3.3 million bbl to 356.6 million bbl in the week ended Mar. 20. US gasoline fell 1.1 million bbl to 214.6 million bbl during the same week. Distillate fuel stocks dropped 1.6 million bbl to 143.9 million bbl (OGJ Online, Mar. 25, 2009).
In New Orleans, analysts at Pritchard Capital Partners LLC said, "Crude inventory levels remain at decade highs and distillate demand is down 9% from last year. Crude spreads have tightened from the beginning of year but still remain wide enough to make the storage trade profitable for those able to locate storage. The spread between the 1-month crude contract and the 12-month contract widened to $10/bbl from the $7/bbl seen 2 weeks ago—if storage can be found, trade is back on. Gasoline demand rebounded from the prior week, a small indication that economic activity picked up, or it might just be spring break driving demand."
EIA's report of a 3.3 million increase in crude inventory "was a little deceiving as inventories at Cushing, Okla., where NYMEX West Texas Intermediate is priced, actually fell 2.2 million bbl," said analysts in the Houston office of Raymond James & Associates Inc.
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The Cushing draw of 2.2 million bbl is impressive, but overall stocks of crude oil in the Midwest have risen by 1.2 million over the same period." Therefore, he said it's unlikely crude suppliers in just a week could find 3.4 million bbl of additional storage capacity in Petroleum Administration for Defense 2 (PADD 2) that covers the US Midwest, including Cushing. "The weekly changes in the composition of stocks in the Midwest do not add up in our analysis, and they have rather the smell of revisions to previously released data or a printing mistake in this week numbers," Jakob said.
He noted a 1.6 million bbl draw from crude storage in the discounted PADD 5, encompassing the West Coast. According to EIA numbers, that would require a total increase of 4.9 million bbl in commercial stocks in the other four PADDs, plus the additional 1.8 million bbl of crude put into the US Strategic Petroleum Reserve in the same period, Jakob said. "Crude oil is being transferred to SPR, but this has not been at the detriment of commercial stocks, and overall PADD 2 stocks are at the highest level since 1990," Jakob said.
"Overall, the stock build over the last 4 weeks is 8.5 million bbl (13 million bbl when including SPR)," Jakob said. That indicates production reductions by the Organization of Petroleum Exporting Countries "are still not translating into visible stock draws," he said, adding, "It does seem that US refineries now have little alternative than to cut runs in order to reduce stocks of products as storage space does not magically grow out of the ground, and product demand is not yet strong enough to absorb the production capacity of the refining system. Gasoline demand is stabilizing close to the levels of a year ago while the demand deficit continues to be in the kerosine and distillate part of the complex."
Separately, at a Mar. 25 meeting in New York, Treasury Secretary Timothy Geithner said he is "open" to the possibility the international reserve asset—created by the United Nations' International Monetary Fund in 1969 to supplement the existing official reserves of member countries—as a potential world currency, as China has proposed. That sent the dollar index into a dive, but a major sell off was avoided "only by the administration having to send the fire brigade to spin the Geithner gaffe out of the market," said Jakob.
Energy prices
The May contract for benchmark US sweet, light crudes dropped $1.21 to $52.77/bbl Mar. 25 on NYMEX. The June contract fell $1.44 to $54.19/bbl. On the US spot market, WTI at Cushing was up $1.21 to $52.27/bbl, still trying to catch up to the price of the new front-month NYMEX contract. Heating oil for April delivery lost 3.49¢ to $1.46/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) dipped 0.76¢ to $1.50/gal.
Natural gas for the same month declined 1.8¢ to $4.33/MMbtu on NYMEX. "The recent strength in natural gas has stumped many, as the supply and demand data continue to show the market is oversupplied and concern remains that LNG will hit US shores in the May-June timeframe," said Pritchard Capital Partners.
Raymond James analysts noted, "Gas rallied 18% during the past week following last week's bullish inventory number." However, they said, "We advise investors not to put too much faith into the shoulder season numbers. The market is still on track to fill storage later this summer, which should send natural gas prices lower."
Meanwhile, EIA reported the drawdown of 3 bcf of natural gas from US underground storage in the week ended Mar. 20. That left 1.65 tcf of working gas in storage, up 372 bcf from year-ago levels and 280 bcf above the 5-year average.
In London, the May IPE contract for North Sea Brent crude lost $1.75 to $51.75/bbl. Gas oil for April was down $2.50 to $465.75/tonne.
The average price for OPEC's basket of 12 reference crudes dropped 30¢ to $50.14/bbl on Mar. 25.
Contact Sam Fletcher at [email protected].