MARKET WATCH: Crude price slips in mixed trading

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 5 -- The front-month crude contract slipped slightly Aug. 4 after failing to climb above $72/bbl in mixed trading on the New York market.

“Crude prices took a breather yesterday following an $8/bbl rally over the prior three trading sessions,” said analysts in the Houston office of Raymond James & Associates Inc.

Unemployment data to be published later this week will be “a potential source of volatility, with the report expected to show that US payrolls fell by 325,000 (better than June's 467,000, but still a large amount),” said Raymond James analysts. Traders also were awaiting results of the Aug. 5 meeting of the UK's Financial Services Authority meeting to discuss the impact of speculation, following last week's US Commodity and Futures Trading Commission hearings on whether to limit oil and gas trades.

At the start of the third and last CFTC hearing Aug. 5, Chairman Gary Gensler said, “Several major market participants—including exchanges and traders—suggested their support for position limits” at the previous two hearings in late July. “In addition, major traders testified last week that they believed position limits in the energy realm would be beneficial to the market,” he said.

Written comments will be accepted and recorded by the CFTC until Aug. 12. Instructions for submitting comments are available on the CFTC website.

Oil traded flat in the early hours of the Aug. 5 New York session as traders waited for the latest government report on US inventories of crude and petroleum products. “As always the most critical number of the release will be the gasoline and distillate figures as a draw in either gasoline or distillates would provide some indication of economic recovery,” said analysts at Pritchard Capital Partners LLC, New Orleans.

US inventories
The Energy Information Administration subsequently reported commercial inventories of benchmark US crudes increased by 1.7 million bbl to 349.5 million bbl in the week ended July 31. That exceeded the Wall Street consensus for a 600,000 bbl build and an earlier bullish report by the American Petroleum Institute of a 400,000 bbl draw. Gasoline stocks dipped by 200,000 bbl to 212.9 million bbl during the same period, short of Wall Street’s expectations of a 800,000 bbl drop. Distillate fuel inventories decreased by 1.1 million bbl, compared with the consensus for an increase of 1.2 million bbl.

Crude imports into the US during the same week were down 737,000 b/d to 9.3 million b/d. Crude imports averaged 9.5 million b/d in the 4 weeks through July 31, down 590,000 b/d from the same period in 2008.

The input of crude into US refineries declined 174,000 b/d to 14.4 million b/d last week, with units operating at 84.5% of capacity. Gasoline production increased to 9.1 million b/d while distillate fuel production decreased to 3.8 million b/d.

“Refined product inventories (gasoline plus distillate plus jet fuel) were essentially unchanged . . . as weak demand was offset by lower production,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “Reduced supply has helped raise refining margins over the past few weeks; however, we remain concerned that refiners will post another weak quarter of earnings in the third quarter due to very narrow crude oil differentials.”

The latest EIA data are slightly positive for refiners due to declines in both gasoline and distillate inventories, Rousseau said. “The average US refinery utilization rate decreased to 84.5% from 84.6% last week, and production of light products fell 0.7%. Finished product imports decreased modestly.”

The rolling 4-week demand growth average for refined products was down 3.1% from year-ago levels, compared with a 4.1% drop in the previous 4-week period. Total light product demand increased 1.7% from the previous week. “Gasoline inventories are 3% above their 5-year average for [the] calendar week, while distillate inventories are 26% ahead of the 5-year mean,” Rousseau said. “We estimate that the average US refining margin (3-2-1) increased from approximately $11.89/bbl to $12.75/bbl over the past week, and has averaged $10.39/bbl year-to-date vs. about $12/bbl in 2008 and vs. $18/bbl in 2007.”

He estimated the price spread between West Texas Intermediate crude and the heavier Maya crude from Mexico averaged $4/bbl last week, down from $12/bbl in 2007 and $16/bbl in 2008.

Rousseau reported, “The EIA regional data showed another large decline to West Coast gasoline inventories, which have fallen 1.7 million bbl (6%) over the past 2 weeks. This has been due in part to very low refinery utilization rates in the region, which were about 73% last week, the lowest weekly level since March 2007. The net result of this data has been higher West Coast refining margins.”

Meanwhile, a 26% increase in Chinese crude imports in July 2009 from year-ago levels “highlights Chinese growing demand for crude,” said Pritchard Capital Partners. “Plus, the Chinese policy of subsidizing gasoline prices will also ensure Chinese demand remains robust. Bottom line, the growth of Chinese economy and their policy of subsidizing gasoline prices (Economics 101—subsidized, artificially lower prices means greater demand) might be most important driver for crude.”

Energy prices
The September contract for benchmark US light, sweet crudes topped out at $71.95/bbl in intraday trading Aug. 4 before closing at $71.42/bbl, down 16¢ for the day on the New York Mercantile Exchange. The October contract increased 12¢ to $71.94. Prices for subsequent monthly contracts also increased and remained in contango. On the US spot market, WTI at Cushing, Okla., was down 16¢ to $71.42/bbl. Heating oil for September increased 3.01¢ to $1.90/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dropped 1.26¢ to $2.06/gal.

The September natural gas contract lost 3¢ to $4/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 6¢ to $3.55/MMbtu. “Natural gas remains at top end of the $3.20-4.30 trading range,” said Pritchard Capital Partners.

“Weather forecasters widely expect El Niño conditions will continue to develop and are expected to last through the Northern Hemisphere into winter 2009-2010. It is well accepted that El Niño reduces hurricane activity in the Atlantic Basin, so the possibility of a hurricane cutting off [gulf] natural gas production seems a less likely event as hurricane season approaches. Also Chesapeake Energy Corp. said they no longer plan to curtail North American natural gas production,” Pritchard Capital analysts said.

Chesapeake spokesmen said in April they would shut in 400 MMcfd because of low prices and large storage. Pritchard Capital analysts said Chesapeake now is “taking the view storage will be full at some point in the third quarter; therefore, they will produce what they can now.”

In London, the September IPE contract for North Sea Brent crude increased 73¢ to $74.28/bbl. Gas oil for August gained $4.25 to $595.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 19¢ to $71.53/bbl on Aug. 4.

Contact Sam Fletcher at [email protected]