MARKET WATCH: Crude finishes below $38/bbl in New York market

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 11 -- Front-month crude prices fell 5% to under $38/bbl Feb. 10 on the New York futures market after the US Energy Information Administration again lowered its outlook for global oil demand in 2009, down by an additional 400,000 b/d as a result of weak economies around the world.

The Department of Energy agency now expects world demand to be 1.2 million b/d less in 2009 than in 2008 before rebounding in 2010 with recovery of the international economy. Total petroleum consumption was down 1.2 million b/d or 5.8% in 2008, "the largest annual decline since 1980," said analysts at Pritchard Capital Partners LLC, New Orleans. "The expected economic recovery in 2010 is projected to boost total petroleum products consumption by 220,000 b/d, or 1.1%. Total natural gas consumption is projected to decline by 1.3% in 2009 and then increase by 0.6% in 2010. Total US marketed natural gas production is expected to rise slightly in 2009 and fall by 1.1% in 2010," they said.

The International Energy Agency on Feb. 11 also reduced its previous estimate of global oil demand, down by 570,000 b/d to 84.7 million b/d for 2009 after the United Nations' International Monetary Fund again slashed its gross domestic product growth prognosis to 0.5% (OGJ Online, Feb. 11, 2009). IEA's 2008 world demand estimate remains largely unchanged at 85.7 million b/d. "Two consecutive years of demand decline have not occurred since 1982-83," said IEA officials.

In the Houston office of Raymond James & Associates Inc., analysts reported crude prices were higher in premarket trading Feb. 11 after passage of an economic stimulus plan by the US Senate. Some analysts are concerned that the proposed US economic stimulus plan will not will not rectify the recession.

Douglas-Westwood Ltd. analysts in New York reported Feb. 11: "As financial crises go, the current recession is arguably the worst since the Crash of 1929. However, as recessions go, the current economic situation is relatively severe, worse than those of 1991 or 2001, for example, but to date less severe than the double-dip recession of 1980-1983. Most recessions last less than 18 months from peak to trough and in fact only three in the last century, including the Great Depression, were longer."

They observed, "Economists are currently split on the course of the recession. Some argue for a midyear trough, which would represent an 18-month contraction. This represents the more optimistic case. It is supported by January job loss numbers at expected levels and by the relative stability in share prices, which tend to bottom 6 months before the real economy. More pessimistic economists point to weaker than expected consumer spending and project a third-quarter trough."

US inventories
EIA reported Feb. 11 commercial US crude inventories continued to climb for 18 of the last 20 weeks, up by 4.7 million bbl to 350.8 million bbl in the week ended Feb. 6, exceeding Wall Street's expectations of a 2.8 million bbl gain. Gasoline stocks fell 2.6 million bbl to 217.6 million bbl, in contrast to a consensus for an increase of 500,000 bbl. Distillate fuel inventories dropped 1 million bbl to 141.6 million bbl, less than the 1.5 million bbl decline that Wall Street expected.

In that same period, imports of crude into the US fell by 385,000 b/d to 9.7 million b/d. The input of crude into US refineries declined 214,000 b/d to 14.1 million b/d with units operating at 81.6% capacity. Gasoline production fell to 8.5 million b/d, and 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) declined 2.1 million bbl (0.5%) due primarily to reduced domestic production. Refiners operated at only an 81.6% utilization rate and produced only 8.5 million b/d of gasoline, lows that have not been seen since the hurricanes of last fall. We expect improved refining margins to attract supply in the coming weeks, which should build gasoline inventories substantially prior to the summer driving season, a negative for refiners."

The latest EIA data, he said, showed most of the inventory declines were on the East Coast (gasoline down 2.6 million bbl and distillate down 2.3 million bbl) due to an estimated drop in refinery utilization rates from 81% to 76%. "Another interesting data point was that West Coast gasoline imports increased to 144,000 b/d last week, the highest weekly level since July 2007 and a signal that the high California gasoline margins have begun to attract supply," Rousseau said.

Energy prices
The March contract for benchmark US light, sweet crudes dropped $2.01 to $37.55/bbl Feb. 10 on the New York Mercantile Exchange. The April contract fell $2.08 to $43.76/bbl, a closing price spread of more than $6/bbl from the front-month contract that is to expire next week. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.01 to $37.55/bbl. Heating oil for March delivery lost 5.09¢ to $1.30/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) dipped by 0.32¢ to $1.24/gal.

Natural gas for the same month dropped 26.4¢ to $4.54/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 6.5¢ to $4.83/MMbtu. Futures gas prices "fell for the first time in 5 days as a mild weather forecast for the eastern half of the US is expected to hinder demand," said Pritchard Capital Partners.

In London, the March IPE contract for North Sea Brent crude lost $1.41 to $44.61/bbl. The February gas oil contract fell $8.50 to $427.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 38¢ to $43.47/bbl on Feb. 10.

Contact Sam Fletcher at [email protected].