MARKET WATCH: Surplus crude stocks pull down NY crude price

Report of record high inventories in the key distribution point of Cushing, Okla., triggered the continued retreat of crude prices on the New York market, while in London North Sea Brent climbed by 2.5% Mar. 9 on continued fears of supply disruptions from escalating warfare in Libya.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 10 -- Report of record high inventories in the key distribution point of Cushing, Okla., triggered the continued retreat of crude prices on the New York market, while in London North Sea Brent climbed by 2.5% Mar. 9 on continued fears of supply disruptions from escalating warfare in Libya.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “The stockpile increase at Cushing to 40.3 million bbl, the highest ever recorded level, put enough pressure on prices to offset any support from larger than expected product draws and increased risk premium due to the intensifying Libyan violence, which helped push Brent higher.” He reiterated, “Fundamentally the infrastructure bottleneck between Cushing and Gulf Coast [inventories] could easily keep the Brent-West Texas Intermediate spread in $5-10/bbl range for a protracted period and calls for the demise of this spread are somewhat premature in our view.”

Analysts in the Houston office of Raymond James & Associates Inc. said, “Natural gas rose 1.7% and continued to trade in its recent narrow range just below $4[/MMbtu].”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Faced with the Libya crude supply shortfall, the oil market is adjusting for the changes in crude slate, i.e. more high-sulfur crude and less sweet crude. This has already been evident in widening of sweet (low sulfur) or sour (high sulfur) crude differentials, as well as the widening of the spread between high-sulfur fuel oil and low-sulfur fuel oil (high-low spread).”

The market appears “less concerned about a distillate crunch, with its experience in the first half of 2008 leading to a subsequent expansion in desulfurization capacities,” Zhang said. “Barring other refining bottlenecks, the oil market might be more able to cope with the changes in crude slate this time round. That said, facing the potential of further destruction in sweet crude supply, the sweet-sour spread and the high-low spread are unlikely to narrow any time soon.”

The oil market generally is expected to continue trading at a heated level because of the turmoil in the Middle East and North Africa. The market also is wary of moves by members of the Organization of Petroleum Exporting Countries and the possibility of international intervention in Libya. “Both could send volatility even higher,” said Zhang.

Meanwhile, he said, “The ongoing adjustment in the oil market will assist margins for more complex refineries while compressing margins for simpler refineries. We do not expect a cross-board improvement in refining margins as we saw in 2007 and into the first half of 2008. Instead, we would view an improvement in refining margins as an opportunity for margin hedging.”

Natural gas on Mar. 9 recovered previous losses on technical support, Sharma said. “The last gasps of the fast retreating weather suggest that the temperatures in parts of the Midwest and Mid-Atlantic could be below normal over the last 10 days of March. However, we expect that the warming trend across much of the country could result in an early injection in the third week of March and before the withdrawal season is officially over on Mar. 31. Although prices will most likely remain in a narrow range around the current level until April, we expect natural gas to gain sustainable support going into the summer as we anticipate 2011 supplies to peak around the March-April timeframe,” he said.

US storage
On Mar. 10, the Energy Information Administration reported the withdrawal of 71 bcf of natural gas from US underground storage. That put working gas in storage at 1.67 tcf, up by 32 bcf from last year’s level at this point and 21 bcf above the 5-year average. Wall Street’s consensus was for a withdrawal of 79 bcf.

EIA earlier reported commercial US crude inventories gained 2.5 million bbl to 348.9 million bbl in the week ended Mar. 4, outstripping Wall Street’s consensus for a 1 million bbl increase. Gasoline stocks fell 5.5 million bbl to 229.2 million bbl within the same period, far exceeding market expectations of a 1.5 million bbl decrease. Both finished gasoline and blending component stocks were down. Distillate fuel inventories dropped 4 million bbl to 155.2 million bbl, much lower than analysts’ consensus of a 500,000 bbl decline (OGJ Online, Mar. 9, 2011).

Energy prices
The April contract for benchmark US sweet, light crudes fell 64¢ to $104.38/bbl Mar. 9 on the New York Mercantile Exchange. The May contract lost 34¢ to $105.61/bbl. On the US spot market, WTI at Cushing was down 64¢ to $104.38/bbl.

Heating oil for April delivery increased 5.96¢ to $3.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 8.05¢ to $3.03/gal.

The April contract for natural gas jumped by 6.6¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 1¢ to $3.82/MMbtu.

In London, the April IPE contract for North Sea Brent climbed $2.88 to $115.94/bbl. Gas oil for March rose $14.75 to $964.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased 41¢ to $109.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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