Crude market lacks direction

Feb. 12, 2008
Crude futures prices fluctuated sharply within a $5/bbl range in a directionless market in early February, with traders torn between fears of an economic recession and potential threats to oil supplies.

Sam Fletcher
Senior Writer

Crude futures prices fluctuated sharply within a $5/bbl range in a directionless market in early February, with traders torn between fears of an economic recession and potential threats to oil supplies.

Energy prices fell heavily Feb. 1, with the front-month crude contract dropping $2.79 to $88.96/bbl on the New York Mercantile Exchange after the US Department of Labor reported nonfarm payrolls fell by 17,000 in January, marking the first monthly decline since August 2003. However, the market was unaffected by an earlier decision that day by ministers of the Organization of Petroleum Exporting Countries to make no production changes. The general assumption that OPEC would take no action had already been priced into the market, analysts said (OGJ Online, Feb. 1, 2008).

The front-month crude contract rebounded above $90/bbl Feb. 4 as reports of weekend battles in Nigeria and Iraq reminded traders of the vulnerability of oil supplies from those regions. Analysts also said the market had gone too far with a 3% drop in the contract price Feb. 1, resulting in readjustments (OGJ Online, Feb. 4, 2008).

Soleil-Back Bay Research analyst Jacques H. Rousseau said US petroleum inventories should be starting a seasonal decline after rising 7% since mid-November. "We upgraded the refining sector due to our view that seasonally rising demand and falling supply should result in a 10% decrease to refined product inventories (gasoline, distillate, and jet fuel) by the end of the first quarter. We believe that falling inventory levels are the key leading indicator for improvements in refining margins and stock prices," he said.

The crude contract dipped below $89/bbl Feb. 5, wiping out the previous day's gains in the New York futures market, when the Institute for Supply Management's nonmanufacturing index fell to a reading of 41.9% for January, down from 54.4% in December and well below the 53% reading that many economists had expected. That was both the largest single-month drop and the second-lowest reading ever in the index's history. It also was the first reading since March 2003 that dipped below 50%, indicating that most services sector firms are contracting.

Inventories increase
Crude prices continued to fall, closing at $87.14/bbl Feb. 6 on NYMEX after the US Energy Information Administration reported the largest 1-week gain in commercial US inventories since March 2004 as refiners slowed operations in the face of weak margins and oil imports climbed. Commercial US crude inventories rose by 7 million bbl to 300 million bbl in the week ended Feb. 1 (OGJ Online, Feb. 6, 2008). Gasoline stocks increased by 3.6 million bbl to 227.5 million bbl—the highest level since February 1999—while distillate fuel inventories gained 100,000 bbl to 127.1 million bbl. "Both heating oil and diesel inventories should be drawing fast at this point, but they have instead risen," said Paul Horsnell at Barclays Capital Inc., London.

Imports of crude into the US increased by 458,000 b/d to 10.5 million b/d in the week ended Feb. 1. However, the input of crude into US refineries declined by 126,000 b/d to 14.5 million b/d with refineries operating at 84.3% of capacity. Gasoline production decreased to 8.7 million b/d as distillate fuel production increased to 4 million b/d.

Analysts in the Houston office of Raymond James & Associates Inc. reported, "Refinery utilization continues to decrease and has now reached levels not seen since March of 2006."

Rousseau said, "Refined product inventories increased more than expected…due to lower demand and higher imports. However, the average refinery utilization rate continued to fall, suggesting lower production in the coming weeks."

Price rises
On Feb. 7, however, crude futures prices increased modestly $88.11/bbl, ending a sharp 2-day decline on NYMEX. The turnaround came after Royal Dutch Shell PLC curtailed 130,000 b/d of crude exports from Nigeria, pending repair of a pipeline damaged by rebel forces. A day earlier, Total SA was reported to have shut in production of 280,000 boe/d from the North Sea.

Crude traded at $88-91.98/bbl Feb. 8 on NYMEX before settling at $91.77/bbl, the highest closing in more than a week, as Venezuelan President Hugo Chavez threatened to cut off exports to the US over a legal battle with ExxonMobil Corp. Courts in the US and the UK granted ExxonMobil's requests to freeze more than $12 billion in assets of Petroleos de Venezuela SA (PDVSA) to ensure payment for the nationalization of two Venezuelan oil projects in which the US company was involved. ExxonMobil said it also obtained attachment orders against PDVSA assets in the Netherlands and Netherlands Antilles.

(Online Feb. 12, 2008; author's e-mail: [email protected])