MARKET WATCH: Economic assurances boost energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 25 -- The front-month crude contract's price increased Feb. 24 and climbed above $40/bbl in premarket trading Feb. 25, driven by a strong equity market and assurances from Federal Reserve Chairman Ben Bernanke that the US government did not intend to nationalize big banks.

The price rise also was aided by anticipation of a new increase in US crude inventories from an expected rebound in imports and lower refinery demand, said analysts in the Houston office of Raymond James & Associates Inc.

US inventories
However, the Energy Information Administration said Feb. 25 commercial US crude inventories increased just 700,000 bbl to 351.3 million bbl in the week ended Feb. 20. That compared with a loss of 200,000 bbl the previous week and was well below Wall Street's latest consensus for a 1.3 million bbl build. Still, crude inventories remain above average for this time of year.

Gasoline inventories dropped 3.4 million bbl to 215.3 million bbl through Feb. 20, in sharp contrast to expectations of no change. Distillate fuel inventories were up 800,000 bbl to 141.6 million bbl, above average for this period. The Wall Street consensus was for a decline of 1.2 million bbl.

Imports of crude into the US declined by 24,000 b/d to 8.8 million b/d in that same period. The input of oil into US refineries was down by 207,000 b/d to 13.9 million b/d, with units operating at 81.4% of capacity. Nevertheless, gasoline production increased to 8.9 million b/d during that week, with distillate production up slightly to 4.2 million b/d.

EIA data "showed falling gasoline inventories, especially on the East and West coasts," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. However, he said, "The most interesting data points, in our view, were the changes to refinery utilization rates, which we estimate decreased from 77% to 68% on the East Coast and increased from 84% to 89% on the West Coast."

Paul Horsnell at Barclays Capital Inc., London, said, "Gasoline is emerging as the strongest of the main oil products, with demand recovering from the severe declines seen in the third quarter." He said, "Having represented as much as a half of the overall year-over-year decline in the Organization for Economic Cooperation and Development nations' oil demand in the middle of 2008, gasoline now makes up less than a fifth of that overall decline and seems on course to move back into year-over-year demand growth before the other main products."

Another area of relative strength is the physical crude markets, "with a tightening phase already under way in most markets outside of the US," Horsnell said. "That move away from physical market slack is particularly evident for the heavier crude oils, given the scale of the contraction in their supply availabilities. The size of the contango is starting to weaken outside of the US, and we would expect contango to cease being an issue in the Brent market some time before the more logistically constrained, inventory overhung, and distorted market for West Texas Intermediate normalizes."

He said, "At this stage, we still view WTI as having largely decoupled as an indicator of the global market. We would look to Brent and physical market differentials to be stronger and earlier indicators of the long process of the turning of the cycle towards first balance and then some mounting supply side tightness."

Energy prices
The April contract for benchmark US light, sweet crudes climbed $1.52 to $39.96/bbl Feb. 24 on the New York Mercantile Exchange. The May contract increased $1.49 to $42.76/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.37 to $38.96/bb. Heating oil for March increased 3.28¢ to $1.21/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) gained 4.04¢ to $1.08/gal.

Natural gas for the same month escalated by 13.9¢ to $4.24/MMbtu on NYMEX—"the biggest 1-day gain since Jan. 2; colder weather helped send prices higher as below-normal temperatures are expected to sweep into the Midwest and Northeast by Mar. 1 and linger for most of the week," said analysts at Pritchard Capital Partners LLC, New Orleans. On the US spot market, gas at Henry Hub, La., also finished at $4.24/MMbtu, unchanged from the previous session.

In London, the April IPE contract for North Sea Brent crude gained $1.51 to $42.50/bbl. However, the March gas oil contract dipped by $2.75 to $372.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 58¢ to $38.95/bbl on Feb. 24.

Contact Sam Fletcher at samf@ogjonline.com.