MARKET WATCH: Energy prices fall as crude stocks increase

Sam Fletcher
Senior Writer

HOUSTON, Jan. 28 -- Energy prices fell sharply Jan. 27 in anticipation of continued increases of crude and gasoline inventories in the US because of decreasing demand.

"Prices continue to be susceptible to economic headlines, as US home prices fell by 18.18% in November year over year," said analysts at Pritchard Capital Partners LLC in New Orleans.

At Raymond James & Associates Inc. in Houston, analysts reported, "It was a mixed bag [Jan. 27] for energy indices and commodities. The broader markets, particularly financials, are expected to rally this morning, following reports that the Obama administration is nearing a deal to buy illiquid or bad assets from financial institutions."

They said, "This week the Senate Finance Committee voted for an even more generous [than the House of Representatives] package of renewable energy incentives as part of the stimulus bill. Both bills extend the production tax credit (PTC) for wind and other nonsolar power by 3 years, from yearend 2009 through 2012. Also, both allow developers to claim the investment tax credit in lieu of the PTC in 2009-10. However, the Senate would allow companies to carry back their credits for 5 years—instead of 1 year currently—to offset their income tax."

US inventories
The Energy Information Administration under the Department of Energy said Jan. 27 commercial US inventories of crude jumped by 6.2 million bbl to 338.2 million bbl during the week ended Jan. 23. Gasoline stocks decreased 100,000 bbl to 219.9 million bbl. Distillate fuel inventories dropped 1 million bbl to 144 million bbl. That marked the second big increase in crude inventories in as many weeks, with EIA previously reporting a 6.1 million bbl increase for the week of Jan. 16; that earlier report also said gasoline had escalated by 6.5 million bbl.

This time Wall Street was anticipating increases of 2.8 million bbl in crude and 1.8 million bbl in gasoline. The consensus was for a 1.1 million bbl draw on distillate fuels.

Imports of crude into the US fell 158,000 b/d to 9.7 million b/d last week, EIA said. Crude input into US refineries was essentially unchanged at 14.1 million b/d with units operating at 82.5% capacity, down from 83.3% the previous week. Gasoline production fell to 8.7 million b/d, while distillate fuel production increased to 4.2 million b/d.

The American Petroleum Institute this week resumed its previous practice of releasing its weekly US inventory estimates after the close of markets on Tuesdays, ahead of EIA's Wednesday morning releases. API said crude inventories were up 800,000 bbl to 338.1 million bbl; gasoline increased 942,000 bbl to 215.5 million bbl; and distillate fuel fell 345,000 bbl to 141.1 million bbl.

"The EIA report has historically received more attention, in our view, but that may change now that the API is being released first," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. "We view the API data as neutral for refiners as the smaller than expected decline to distillate inventories was offset by the smaller than forecasted build to gasoline stocks."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "For its grand come-back the API report did not provide any big numbers to create immediate waves, but the API's fear…probably contributed to yesterday's volatility. Market stability does not come by allowing key statistics to be released at the time of a market liquidity low-point, and we can only imagine what will happen when the API will come up with a surprise build or draw of 5 million bbl."

Jakob noted, "Until 2003 the API numbers were released late on Tuesdays, but back then there was not much electronic and algorithmic trading, and we view this change in the API schedule as an oversight failure that will bring little benefit to the market. This being said, the API only showed a small build in gasoline and has not corrected up to the DOE gasoline numbers, leaving a big discrepancy between the two. The pressure now shifts to the DOE to confirm its stock number."

Jakob said, "Crude oil time spreads remain however highly volatile, and the contango is widening again. More parcels have been sold out of floating storage in the North Sea, and a few more are likely to be sold since having a half-empty floating VLCC does not make much sense. The crude coming out of floating storage will make for some market pressure, but it is the start of a stock clean-up process."

According to EIA data, Rousseau said, "Refined product inventories (gasoline plus distillate plus jet fuel) decreased 1.1 million bbl (0.3%), the first weekly decline since November. However, the decrease is primarily due to reduced production (refiners operated at an 82.5% utilization rate, the lowest since October) and not improved demand, which is still 2.2% below the comparable week from last year. Distillate inventories are now 10% above the 5-year average for this calendar week, and we expect this higher supply to place downward pressure on margins, a negative for the refining stocks."

He estimated the average US refining margin (3-2-1) decreased from $17.24/bbl to $10.37/bbl over the past week, compared with averages of $12/bbl in 2008 and $18/bbl in 2007.

Energy prices
The March contract for benchmark US light, sweet crudes fell $4.15 to $41.58/bbl Jan. 27 on the New York Mercantile Exchange. The April contract dropped $3.58 to $44.90/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.15 to $41.58/bbl. Heating oil for February lost 5.25¢ to $1.37/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) declined 4.46¢ to $1.11/bbl.

Natural gas for the same month gained 1.3¢ to $4.50/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 14.5¢ to $4.76/MMbtu.

In London, the March IPE contract for North Sea Brent crude lost $3.23 to $43.73/bbl. The gas oil contract for February fell $26.50 to $429.50/tonne, wiping out most of the $39.25 gain from the previous session.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $1.85 to $40.68/bbl on Jan. 27.

Contact Sam Fletcher at samf@ogjonline.com.