MARKET WATCH: Surprise inventory increase cuts energy prices

Energy prices pulled back Nov. 15 after EIA reported the first build in US oil inventories in 4 weeks and OPEC reduced its growth forecasts for global oil demand.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 16 -- Energy prices pulled back Nov. 15 after the Energy Information Administration reported the first build in US crude inventories in 4 weeks and the Organization of Petroleum Exporting Countries reduced its growth forecasts for global oil demand.

Citing higher energy prices and warmer winter weather in the Northern Hemisphere, OPEC reduced its estimate of fourth-quarter growth in global oil demand by 100,000 b/d to 1.7 million b/d, for a growth rate of 1.97%, which was down from 2.1% in its previous monthly report. OPEC said total demand for crude in 2007 will grow only 1.4%, not 1.5% as previously estimated, but its outlook for the first quarter of 2008 remains unchanged at 1.8% growth, or 1.5 million b/d.

Earlier this week, OPEC officials rejected US Secretary of Energy Samuel Bodman's request that the group agree at their scheduled meeting this weekend to boost production to drive down prices. OPEC ministers said they will wait until the Dec. 5 policy meeting in Abu Dhabi to discussion production.

EIA reported commercial US crude inventories jumped by 2.8 million bbl to 314.7 million bbl in the week ended Nov. 9. The consensus of Wall Street analysts was for a decline of 400,000 bbl. US gasoline stocks increased by 700,000/bbl to 195 million bbl vs. an expected drop of 200,000 bbl. Distillate fuel inventories fell 2 million bbl to 133.4 million bbl during the same period, instead of the expected decline of 100,000 bbl.

"The crude build was higher than expected but took place mostly in the discounted PADD 5 (Petroleum Administration for Defense District 5) [including the West Coast, Alaska, and Hawaii] while PADD 2 [the Midwest, including the Cushing, Okla., pipeline distribution point] remained unchanged. The crude imports were, however, rebounding and not showing a strong impact from the Mexican weather disruptions," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

"Following a sharp rise in imports, oil inventories rose by just 900,000 bbl east of the Rockies and were flat at Cushing," said Paul Horsnell at Barclays Capital Inc. in London. "Like crude oil, the rise in gasoline inventories was concentrated on the West Coast, and the required seasonal build before yearend still looks far too anemic to us."

Despite an unexpected build in the last reported week, gasoline stocks remain near the bottom of the 5-year range in terms of days cover. US Northeast heating oil stocks are above the 5-year average with a warmer winter now expected, said the Societe Generale Group in Paris. Horsnell also noted that US gasoline demand appears to have been down only 0.4% from year-ago levels in the first 8 days of November despite a 39.4% jump in retail prices.

On a bullish note, Algeria's Oil Minister Chakib Khelil said his country's production capacity has not increased as fast as planned and will not meet its 2010 target output capacity of 2 million b/d. "Instead the country plans to stabilize at its current production capacity rate of 1.5 million b/d," said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, Royal Dutch Shell PLC said it again shut in an undetermined amount of Nigerian crude production following an attack on a major oil pipeline to its Forcados export terminal. Repeated attacks on oil facilities have forced the shutdown of 28% of Nigeria's estimated 2.5 million b/d production capacity this year.

Energy prices
The December contract for benchmark US light, sweet crudes dropped 66¢ to $93.43/bbl Nov. 15 on the New York Mercantile Exchange. The January contract lost 76¢ to $92.07/bbl. On the US spot market, West Texas Intermediate at Cushing was down 66¢ to $93.44/bbl. The December contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.42¢ to $2.34/gal on NYMEX. Heating oil for the same month declined by 1.47¢ to $2.56/gal.

The December natural gas contract dropped 13.5¢ to $7.70/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., inched up 1.5¢ to $7.32/MMbtu. EIA reported the withdrawal of 9 bcf of gas from US underground storage during the week ended Nov. 9—the first withdrawal for this winter season. That was at the high end of consensus among Wall Street analysts and compared with injections of 36 bcf the prior week and 5 bcf during the same period last year. US gas storage now tops 3.5 tcf, up 87 bcf from year-ago levels and 273 bcf above the 5-year average. That withdrawal "does not appear to reflect any overall change in our domestic supply-demand outlook," said Robert S. Morris, Banc of America Securities LLC, New York.

Morris said, "The nearly 100 bcf year-over-year domestic natural gas storage surplus at the start of November was underscored by a higher average pace of injections this year. Most notably, US natural gas supply increased 1.5 bcfd, driven by nearly 1.1 bcfd higher domestic production owing to the ongoing ramp-up in unconventional resource plays along with the start up of the eastern deepwater Gulf of Mexico Independence Hub in July, an 800 MMcfd increase in LNG imports, and 100 MMcfd lower exports to Mexico, all of which were only partially offset by a nearly 500 MMcfd drop in imports from Canada."

Moreover, Morris said, "The resumption of lingering shut-ins from the 2005 hurricane season added roughly 300 MMcfd to domestic supply this injection season. These variables more than offset greater overall weather-related demand for the April-through-October period (400 MMcfd) and an up tick in demand due to economic growth (500 MMcfd).

In London, the December IPE contract for North Sea Brent crude lost 42¢ to $90.94/bbl, while gas oil for the same month was unchanged at $807.50/tonne.

The average price for OPEC's basket of 12 reference crudes gained 44¢ to $87.01/bbl on Nov. 15.

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