MARKET WATCH: Crude prices rally above $49/bbl

Front-month oil prices continued to climb to a 3-month high above $49/bbl Mar. 17 after the US Department of Commerce reported an unexpected 22% surge in US housing starts during February.

Mar 18th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 18 -- Front-month crude prices continued to climb to a 3-month high above $49/bbl Mar. 17 after the US Department of Commerce reported an unexpected 22% surge in US housing starts during February.

"The price advance was driven by a combination of better-than-expected US economic news…and a stronger equity market," said analysts at Pritchard Capital Partners LLC, New Orleans.

New US housing construction had fallen 38% over the previous 3 months, and economists were expecting a further drop in February. Instead, an 82% increase in construction of apartment buildings resulted in the largest percentage gain in 19 years and the first increase in 8 months. Building permits increased 3% in February, with permits for single-family units up 11%, the largest percentage gain in 18 years. However, some analysts cautioned that it might be a weather-related fluke.

Despite the better housing numbers, the rally of oil prices "was not part of a structured move on commodities as the daily gains were mostly confined to oil," said Olivier Jakob at Petromatrix, Zug, Switzerland. "While we had been calling for a bottoming of the crude oil markets, we are not yet fully confident that the legs of the current rally are strong enough to make a sustained move above $50/bbl. The OPEC cuts should translate in a rebalancing of the supply and demand, but the process is not a straight line and will move in waves between crude oil and refined products," he said.

Initial support for the rally came from a narrowing of physical premiums in the North Sea and a narrowing of the North Sea Brent crude contango, leading to a drawdown of floating storage and the subsequent narrowing of the WTI contango. That in turn could lead to some reduction of discretionary stocks in at the key Cushing, Okla., exchange point, Jakob said.

Jakob said: "While WTI futures have gone back to a premium to Brent, the US gulf physical premiums have lost almost as much as the futures have gained and with poor refining margins in Europe leading to refinery run cuts, the crude oil physical premiums in the North Sea have started to erode and the Brent contango is starting to widen again. Given that freight rates are under continued pressure, we are concerned that we could be reentering a phase of stock building of oil at sea until a refinery margin is recreated. Basically, while we have gone through the first wave of destocking of oil at sea, run cuts are now trying to force a destocking of products, and we need to wait for that process to have an impact on the cracks before we can start to have a next leg of crude destocking."

In Houston, analysts at Raymond James & Associates Inc. expected markets to be mixed Mar. 18 with investors awaiting an afternoon announcement the US Federal Reserve will hold its interest rates steady at 0-0.25% and capitalize its balance sheet to support the credit markets. "While the Bank of England has started purchasing government debt, it is expected that the Fed will likely hold off on such plans, with the hope that the effects of the stimulus package will soon start kicking in," they said.

Raymond James analysts noted, "For the first time in many months, oil prices actually increased, up over 7% in February after bottoming in the low $30/bbl range earlier in the month. Oil is up again so far in March, as investors are taking heed of the Organization of Petroleum Exporting Countries' surprising adherence to its announced cuts (over 80%). For oil to break out above $50/bbl, we believe demand will need to clearly stabilize."

They said, "The long-term outlook for crude is actually stronger. Once demand begins to recover (or even just stabilize), oil prices could rebound very quickly."

Raymond James analysts said, "A fundamentally oversupplied [gas] market has finally begun to show up in the storage numbers, as the year-over-year surplus is now around 300 bcf. Natural gas fell 5% in February, and is already down 5% again so far in March."

However, they said, "Winter weather is now over, and it is clear that the market is oversupplied by more than 5 bcfd due to the combination of stagnant demand and strong year-over-year supply growth (still). While the industry has aggressively cut the gas rig count (already down over 40% from its peak), summer shut-ins will be substantial. We believe total shut-ins may need to be as high as 1 tcf, and natural gas prices will need to fall below $3/Mcf to make this happen. For 2010, the outlook is still uncertain."

US Inventories
Crude prices were lower in early trading Mar. 18 in expectation of a report of increased US inventory of crude. Indeed, the Energy Information Administration said commercial US crude inventories increased 2 million bbl to 353.3 million bbl in the week ended Mar. 13, exceeding the Wall Street consensus of a 1.5 million bbl gain. Crude stocks are above average for this time of year.

However, US gasoline inventories shot up 3.2 million bbl to 215.7 million bbl during the same week in sharp contrast to Wall Street expectations of a 1.5 million bbl draw. Distillate fuel stocks grew by 100,000 bbl to 145.5 million bbl, far short of the anticipated 1 million bbl increase. Distillate stocks also are above average for this time of year.

Imports of crude into the US increased by 59,000 b/d to 9.2 million b/d during the same period. The input of crude into the US refining system rose 64,000 b/d to 14.2 million b/d, with refineries operating at 82.1% of capacity. Gasoline production increased to 8.9 million b/d, while distillate production decreased to 4.1 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Refined product inventories (gasoline plus distillate plus jet fuel) increased 1.9 million bbl (0.5%) last week, due primarily to a large, unexpected 3.2 million bbl increase to gasoline stocks. The data seemed somewhat peculiar, in our view, since supply of finished gasoline (production plus imports) and demand were essentially unchanged vs. last week when the EIA reported a 3 million bbl decline to gasoline inventories. The difference appears to be to the 'gasoline blendstocks' category, where the EIA reported a 3.6 million bbl increase…. 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."

EIA regional inventory data showed gasoline production remained low on the East Coast. "We estimate an average refinery utilization rate of 69%" in that region, Rousseau said. However, East Coast gasoline inventories increased primarily because of higher imports. Rousseau also noted a sharp decline in West Coast refinery utilization rates. "We estimate from 86% to 80%," he said, "which could end the rising gasoline inventory trend in that region."

In other news, Joe Bastardi, the chief long-range and hurricane forecaster at AccuWeather.com, released an early forecast for 2009 that predicts a lower number of named storms and half as many US landfalls, compared with last year. He did not rule out the possibility of another major hurricane hitting the US and said storms may be more likely to form in the Atlantic Basin closer to the coast. The number of storms should still be near or a little above normal, he said.

Energy prices
The April contract for benchmark US light, sweet crudes continued its rally Mar. 17, up $1.81 to $49.16/bbl on the New York Mercantile Exchange. On the US spot market, WTI at Cushing continued trailing the front-month futures contract, up the same amount to the same close. The May contract advanced $1.99 to $50.04/bbl on NYMEX. Heating oil for April delivery escalated 6.17¢ to $1.27/gal. The April contract for reformulated blend stock for oxygenate blending (RBOB) gained 5.65¢ to $1.42/gal.

Natural gas for the same month continued its decline, down 3.8¢ to $3.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1.5¢ to $3.78/MMbtu. "Gas prices fell for the eighth time in 9 days amid continuing demand concerns. Weak industrial demand has been partially offset by increased heating demand this winter, but the heating season is quickly coming to a close. The gas market remains out of balance with US supply growth of 3 bcfd and lower demand down 1.5-2 bcfd," said Pritchard Capital Partners. The market is "waiting on a supply response from the sharp decline in the US rig count (down 45% from the September peak), which we believe could bottom as early as the second quarter down 50-60%," analysts said.

In London, the new front-month May IPE contract for North Sea Brent crude increased $1.78 to $48.24/bbl. Gas oil for April jumped by $18.50 to $399.75/tonne.

The average price for OPEC's basket of 12 reference crudes was up $1.66 to $44.71/bbl on Mar. 17.

Contact Sam Fletcher at samf@ogjonline.com.

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