MARKET WATCH: Crude tops $45/bbl to a 5-week high

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 5 -- Energy prices continued to climb Mar. 4, with front-month crude topping $45/bbl to a 5-week high on the New York futures market following a bullish government report of a surprise draw from commercial oil inventories and continued pickup in gasoline demand.

The Energy Information Administration reported commercial US crude inventories declined 700,000 bbl to 350.6 million bbl in the week ended Feb. 27. Gasoline stocks increased 200,000 bbl to 215.5 million bbl in the same period. Distillate fuel inventories gained 1.7 million bbl to 143.3 million bbl (OGJ Online, Mar. 4, 2009).

The drawdown of crude included a 500,000 bbl draw from Cushing, Okla. "The reduction of stocks in Cushing is for now relatively subdued but should accentuate if the narrowing of the contango is maintained," said Olivier Jakob at Petromatrix, Zug, Switzerland.

Paul Horsnell at Barclays Capital Inc., London, reported, "The latest US weekly data show the strongest February week for gasoline demand ever and a further significant improvement in gasoline fundamentals relative to the weakness in the middle of the barrel."

Both crude prices and US demand appear to have bottomed, said analysts at Pritchard Capital Partners LLC, New Orleans. They noted the crude price contango on the New York market "has narrowed dramatically from $15 to $7, removing incentive for storage," at an assumed monthly storage cost of 30¢/bbl. Moreover, they said, "Technical prices may look to test recent $48/bbl highs."

Natural gas futures rallied "along with an 8.7% gain in crude and 3.6% rise in equities on expectations China will broaden its economic stimulus effort," said Pritchard Capital analysts. They said China Premier Wen Jiabao may announce new stimulus measures Mar. 6, adding to a $585 billion spending plan. "As positive news and data points come in from China we believe that oil has found a solid support level," they said.

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., are maintaining "a real-time outlook on the China stimulus data as they come out, and early indications are that they will not move the needle on natural resource demand." FBR said, "More important, for now at least, is the continued rhetoric from Chinese organizations about acquiring more natural resources and highlighting an early trend to own hard assets."

The oil market's attempt to strike a balance between current tightening of supplies and fears of further demand erosion "has been a recipe for an overall lack of direction over the past 3 months," Horsnell said. "Rounding to the nearest dollar, the value of the Organization of Petroleum Exporting Countries' basket averaged $39/bbl in December, $42/bbl in January, $41/bbl in February, and has started off March at $42/bbl." The average price for OPEC's basket of 12 reference crudes gained $2.02 to $43.39/bbl on Mar. 4.

Oil prices have stabilized "but at a level that is too low to be acceptable" to OPEC, Horsnell said. "A further [production] cut is not needed to sort out the global balances, but it might be needed to give market sentiment a prod. Much will depend on whether a clearer price direction emerges in the 10 days [until OPEC's Mar. 15 meeting], but at this stage we would think that a further small cut, and one that could [be] rowed away from later if necessary, should be the base case expectation for the next meeting," he said.

In other news, the US Department of Labor said initial requests for unemployment benefits fell to 639,000 this week, down from the previous week's figure of 670,000. Analysts had expected a smaller drop to 650,000.

The US Deparment of Commerce said factory orders fell in January for a record sixth consecutive month. Retailers reported sales fell in February but at a slower pace than previously.

Energy prices
The April contract for benchmark US sweet, light crudes escalated by $3.73 to $45.38/bbl Mar. 4 on the New York Mercantile Exchange. The May contract gained $3.29 to $47.20/bbl. On the US spot market, West Texas Intermediate at Cushing was up $3.73 to $45.38/bbl. Heating oil for April increased 3.49¢ to $1.21/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) gained 6.22¢ to $1.38/gal.

Natural gas for the same month increased 5.8¢ to $4.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 21.5¢ to $4.21/MMbtu. EIA reported the withdrawal of 102 bcf of natural gas from US underground storage in the week ended Feb. 27. That reduced the amount of working gas in storage to 1.79 tcf, up 270 bcf from year-ago levels and 218 bcf above the 5-year average

In London, the April IPE contract for North Sea Brent crude gained $2.42 to $46.12/bbl. The March contract for gas oil escalated by $21 to $382.25/tonne.

Contact Sam Fletcher at [email protected].