MARKET WATCH Oil prices climb on conflicting inventory reports

Sam Fletcher
Senior Writer

HOUSTON, Apr. 9 -- The front-month contract for benchmark US crudes climbed above $50/bbl in early trading Apr. 9 following gains in the previous session on the New York futures market after the Energy Information Administration reported a much smaller build than the large jump in oil inventories earlier estimated by the American Petroleum Institute.

The Department of Energy's EIA said commercial US crude stocks gained 1.7 million bbl to 361.1 million bbl in the week ended Apr. 3, nearly in line with Wall Street analysts' consensus of a 1.5 million bbl gain and well below the 7.5 million bbl jump earlier estimated by the API (OGJ Online, Apr. 8, 2009).

In New Orleans, analysts at Pritchard Capital Partners LLC noted, "Over the last month or so crude prices have trended downward early in the week, then rally following the release of the DOE inventory report." Meanwhile, the May contract for North Sea Brent was trading Apr. 9 at a $2.65/bbl premium to the benchmark crude on the New York market for the same month—"the biggest premium for the front-month contract since Feb. 20," said Pritchard Capital Partners.

"Oil inventories built at half the rate of the prior week according to the DOE, giving support to prices yesterday, and likely today," said Pritchard Capital analysts. "Oil imports typically grow in April; however, lower production [among members of the Organization of Petroleum Exporting Countries] means imports are likely to decline from 9.3 million b/d in March to 9.2 million b/d in April. Next week's DOE data could show as much as a 5 million bbl decline in key products as distillate exports increase, while crude could drop for the first time in 6 weeks."

The latest EIA report was highlighted by a "surprisingly large" distillate draw "driven by a demand surge attributable to cold weather and diesel exports; storage levels remain quite high, well above the top of the 5-year range," said Pritchard Capital analysts. They also noted a "surprise build" in gasoline stocks, "driven by a large increase in gasoline production, but offset slightly by lower imports. [Gasoline] demand remains in-line with the 5-year average, while storage levels increased to the top-end of the 5-year range."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research LLC, said refined product inventories (gasoline plus distillate plus jet fuel) decreased 3.2 million bbl (0.8%) last week due primarily to declining distillate stocks. "However, gasoline inventories unexpectedly increased 600,000 bbl, a negative for refiners, and are now 4% above the 5-year average for this calendar week. On a positive note, comparisons to year-ago gasoline demand should become much stronger starting at the end of May due to weak 2008 data last spring and summer," he said.

In Houston, analysts at Raymond James & Associates Inc. said prices for energy corporate stocks rallied Apr. 8, following oil prices higher "after opening in the red." They said, "Crude turned on DOE data after figures showed that total petroleum inventories fell by 300,000 bbl, compared [with] the consensus forecast of a draw of 500,000 bbl. While it was relatively neutral versus consensus estimates, the report was bullish when compared to the API data from [Apr. 7]. Natural gas continues to trade near multiyear lows, and we expect the recent rally in 'gassy' stocks to be relatively short-lived if gas continues to move lower."

US inventory outlook
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The DOE stock build coming in line with [Wall Street] expectations but lower than the API was enough to propel West Texas Intermediate higher, but the big picture has not really been reversed by the DOE report. Overall commercial stocks still build by 2.9 million bbl; on the 4-week average, crude oil supply is still higher than a year ago, and the levels of refinery runs are too high for the amount of demand that is still missing."

On the positive side, he said, crude at the key US transfer point at Cushing, Okla., was drawn down by almost 1 million bbl. "But with US production up 350,000 b/d vs. a year ago (4-week average) while crude oil imports in Petroleum Administration for Defense District (PADD) 3 (US Gulf) are up 327,000 b/d vs. last year and Canadian imports into PADD 2 (Midwest) are up 55,000 b/d, we do not see a prompt crude oil supply issue for the US."

EIA regional inventory data "showed declining gasoline inventories on the East Coast, due to a low level of production (we estimate the refinery utilization rate in the region was only 60% last week)," Rousseau said. However, he said, "It is important to note that gasoline imports into the East Coast could easily rise again if margins improve, in our view. It is also worth noting that distillate inventories on the West Coast declined by 1 million bbl last week and are now only 2% above the 5-year average for this calendar week."

Jakob said, "Crude oil stock levels in the US Gulf will soon reach their record high, and yes, at a certain point US stocks will stop building just because there is no more onshore tank space available. But a few more very large crude carriers have been reported to be fixed for floating storage option in the US Gulf; hence the US, despite the OPEC cuts, is far from approaching a supply deficit."

The next data to watch will be the Paris-based International Energy Agency's (IEA) report of world supply and demand for crude to be released Apr. 10 when US and UK markets will be closed for Good Friday. "Demand will be revised down because the gross domestic product forecasts have been revised down and because the calculated stock draws are not showing up. We will count in a global demand revision by the IEA of at least 500,000 b/d," said Jakob.

"Trading the flat price of crude oil remains, however, a tripartite trade, working the correlations to the dollar index and the equity indices. Equity indices are getting the support of all sorts of changes to the trading rules and are trying to anticipate an economy recovery. The problem remains—unchanged. Anticipating the recovery through equities provides a positive dividend yield, while anticipating the recovery through oil futures or exchange traded funds comes at a yearly cost of between 50-60% through the negative contango roll yield," he said.

In other news, OAO Gazprom, the world's largest natural gas producer, gained its first major entry into the US natural gas market through a pact with Royal Dutch Shell PLC.
Gazprom this year should start shipping LNG from its Sakhalin-2 project in Russia's Far East to Sempra Energy's Energia Costa Azul import terminal in Baja, Calif., which is under a long-term assignment from Shell, said Pritchard Capital analysts.

LNG carrier Maran Gas Asclepius changed its destination to Cove Point, Md., (owned by Dominion Resources) from Isle of Grain (UK) and may arrive "as early as today from Trinidad," they said.

Meanwhile, Raymond James reported another large ethanol producer "bites the dust." VeraSun Energy, the largest US ethanol producer, was forced last fall to file for Chapter 11 protection "under a mountain of debt." Now, analysts say, "Aventine Renewable Energy, which ranks in the top 10, followed suit. Pacific Ethanol is in default and another likely bankruptcy candidate. The lesson in all of this? Not a trick question—Overlevered balance sheets in a commodity business, particularly a business with two (frequently disconnected) commodity prices that must be managed, are rarely a good idea."

Raymond James also noted an "interesting article" in the UK publication, The Guardian, reporting that the first carbon-capture, gas-fueled power plant will soon begin commercial operation in France. "The underground site at which the carbon dioxide will be stored is a depleted gas field near the plant," analysts said. "The bad news: Being the world's first such project, it cost a hefty 60 million euros."

US production
Meanwhile, the Texas Alliance of Energy Producers, the nation's largest state association of independent oil and gas producers, reported an "unrelenting plunge of oil and gas exploration and development activity across Texas continued during February for the fourth consecutive month," according to its latest Texas Petro Index (TPI).

Karr Ingham, the West Texas economist who created the TPI, said the downward spiral in discovery and development of new reserves will be exacerbated by President Barack Obama's plans to repeal long-standing tax provisions that have helped domestic producers withstand brutal pricing swings for decades. "Clearly, Texas producers are stacking rigs and applying for fewer well permits because the recessionary economic environment in the US and around the world has significantly curtailed energy demand and caused commodity prices to come down dramatically," he said.

"Capital funds available for oil and gas exploration and production activity in the US and in Texas have already been greatly reduced. Taking still more investment capital from domestic producers through a greatly increased—and senseless—tax burden would reduce available funding that much more, which would trigger an additional reduction in activity having nothing to do with markets and prices," said Ingham.

A composite index based on a comprehensive group of upstream economic indicators, the Texas Petro Index in February declined to 264.7, after peaking in September and October at 285.4. TAEP cited several leading indicators such as: Crude oil prices in Texas during February averaged $35.87/bbl, down from $38.47/bbl in January and $90.89/bbl in February 2008. And the Baker Hughes count of active drilling rigs in Texas dropped to 574 in February, 127 fewer active rigs on average than in January but 33.7% fewer than in February 2008.

The Texas Railroad Commission through February issued 2,207 drilling permits, down from 3,686 permits in the first 2 months of 2008. The commission this year issued 1,264 permits in January and 943 permits in February, declines from a year earlier of 28.2% and 51%, respectively.

Energy prices
The May contract for benchmark US light, sweet crudes gained 23¢ to $49.38/bbl Apr. 8 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing increased that same amount to the same closing price. The June crude contract climbed 16¢ to $52.07/bbl on NYMEX. Heating oil for May delivery inched up 0.79¢ to $1.40/gal. The same month contract for reformulated blend stock for oxygenate blending dropped 2.08¢ to $1.44/gal.

Natural gas for May advanced 6.8¢ to $3.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 8¢ to $3.51/MMbtu.

In London, the May IPE contract for North Sea Brent increased 37¢ to $51.59/bbl. The April contract for gas oil was unchanged at $439.75/tonne.

The average price for OPEC's basket of 12 benchmark crudes fell 71¢ to $50.25/bbl on Apr. 8.

Contact Sam Fletcher at samf@ogjonline.com