MARKET WATCHEnergy prices fall despite market fundamentals

Feb. 8, 2007
The front-month heating oil contract temporarily hit a 6-week high of $1.7225/gal Feb. 7 on the New York market prior to a general drop in energy prices after crude again failed to rise above the $60/bbl barrier.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 8 -- The front-month heating oil contract temporarily hit a 6-week high of $1.7225/gal Feb. 7 on the New York market prior to a general drop in energy prices after crude again failed to rise above the $60/bbl barrier.

That followed a moderately bullish report by the Energy Information Administration that commercial US crude inventories slipped by 400,000 bbl to 324.5 million bbl during the week ended Feb. 2. US gasoline stocks increased by 2.6 million bbl to 227.2 million bbl in the same week, while distillate fuel inventories declined by 3.7 million bbl to 136.3 million bbl, with decreases in both heating oil and diesel (OGJ Online, Feb. 7, 2007).

"For the first time in a while, the latest US weekly data have demand indications that are pretty good across the board," said Paul Horsnell at Barclays Capital Inc., London. "Heating oil inventories have fallen for a third week, bringing them closer to their 5-year average. From this point they should fall pretty steadily for the next 3 months from their current 53.5 million bbl, taking them down to an end-season level of just above 40 million bbl. Diesel inventories have built above-normal levels in recent weeks, but have at least broken the run of 10 straight increases by falling by 1.8 million bbl in the latest data. Gasoline inventories have continued to finish off the usual seasonal build and remain particularly high on the East Coast. Overall, US oil product inventories drew slightly more than the seasonal average."

Total distillate demand for the week was 4.651 million b/d, "the highest reading seen since February 2004," Horsnell said. "Distillate demand ran up year-over-year by 2.5% in January and has started February at a pace of increase of 7.7%. With the US Northeast set to record subzero centigrade temperatures into next week, some more fairly chunky demand readings are expected in coming weeks," he said.

"It seems that technical trading has crept up again and is overshadowing bullish fundamentals," said analysts in the Houston office of Raymond James & Associates Inc. "The Organization for Petroleum Exporting Countries has cut production by 800,000 b/d (with 100,000 b/d coming from Iraq, which is not subject to quotas) since the enactment of the 1.2 million b/d cut last November. Geopolitically, the world stage continues to remain uncertain. Iran is still steadfast on developing its nuclear program, and tensions have been rising with the US over the explosive situation in Iraq. [Rebel] militia attacks in Nigeria's oil-heavy Niger delta have shown no signs of letdown."

Energy prices
The March contract for benchmark US sweet, light crudes dropped $1.17 to $57.71/bbl as prices on the New York Mercantile Exchange continued to seesaw. The April contract lost $1.09 to $58.35/bbl. On the US spot market, West Texas Intermediate was down $1.17 to $57.72/bbl. Heating oil for March delivery pulled back from the highest interday price on NYMEX since late December to settle at $1.67/gal, down 2.48¢ for the day. The March contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.1¢ to $1.54/gal.

The March natural gas contract climbed by 9.3¢ to $7.71/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., plunged by $1.055 to $7.92/MMbtu. "On the natural gas front, cold weather covering the lower 48 should continue to support prices," Raymond James analysts said.

Meanwhile, EIA reported the withdrawal of 224 bcf of natural gas from US underground storage in the week ended Feb. 2. That was in excess of the consensus among Wall Street analysts and up from withdrawals of 186 bcf the previous week and of 38 bcf during the same period in 2006. US gas storage is now at 2.3 tcf, finally dropping below year-ago levels by 26 bcf but still above the 5-year average by 378 bcf.

In London, the March IPE contract for North Sea Brent crude dropped $1.19 to $57.23/bbl. But gas oil for February inched up 75¢ to $519.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes dipped by 29¢ to $54.29/bbl on Feb. 7.

Contact Sam Fletcher at [email protected].