MARKET WATCH: Crude, products prices up; gas price continues to slump

Crude and petroleum product futures on Mar. 29 regained a portion of their losses from the previous three sessions in the New York market, but the price of natural gas continued to slump.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 30 -- Crude and petroleum product futures on Mar. 29 regained a portion of their losses from the previous three sessions in the New York market, but the price of natural gas continued to slump.

“Natural gas fell 3% as traders took profits on the last day of trading for the April contract and following the release of the January [Energy Information Administration] EIA-914 data point,” said analysts in the Houston office of Raymond James & Associates Inc.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, remains bullish about oil, however. “Converging financial, fundamental, and geopolitical trends suggest that oil prices will be well supported with risk to the upside. We expect crude oil prices to average well above $100/bbl in 2011, with Brent prices ranging between $115-125/bbl out to 2015,” he said.

Sieminski also sees fundamentals for US natural gas improving. He said, “Events in Libya and Japan have placed a strong floor under global gas, and we are now watching US supply and demand data for a turning point in prices by the fourth quarter of the year.”

However, Raymond James analysts said, “Low volumes over the past few days indicate that investors certainly seem skeptical of the market and with good reason—Japan nuclear concerns, unrest in Libya, and the continued European debt crisis. Despite anemic volumes yesterday, the broader market gained almost 1%, reaching levels not seen since violence erupted in Libya in mid-February. Energy stocks outperformed as crude prices rose almost 1%.”

The EIA-914 report showed US natural gas production was down in January but from a higher December base. “While the sequential drop in the January figure was widely anticipated, the upward revision to December volumes prompted the front-month contract to sell-off yesterday (down 10¢/Mcf post-release),” Raymond James analysts said. “January volumes fell 340 MMcfd sequentially, due largely to winter weather delays (particularly in Wyoming, New Mexico, and Texas). December volumes were revised upwards 250 MMcfd—a much higher revision than normal, and muting the actual January decline. Bottom line, our supply outlook remains unchanged. There's too much, and the ‘supply rollover pundits’ are not factoring in number of trends.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil ended yesterday with gains on rising equity markets which were boosted by better-than-expected earnings news.” The term structures for West Texas Intermediate and North Sea Brent strengthened, distillate cracks weakened, while gasoline cracks held steadily, “reflecting seasonal demand changes,” he said.

In other news, Zhang said, “The Syrian cabinet resigned yesterday after a week of heated political protests in the country. However, the country also saw mass rallies supporting the president, which suggests the government is likely to bring the situation under control. Meanwhile, a summit was held in London in an attempt to map out the future of the military intervention in Libya. It remains to be seen whether a clear end game is in sight, with the Pentagon saying the intervention has already cost the US government more than half-a-billion dollars.”

The US consumer confidence survey for March fell to a 3-month low, partly due to rising energy and food prices. The March Eurozone consumer confidence also softened compared with the previous month, Zhang said.

Federal Reserve efforts
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Despite all the efforts of the US Federal Reserve to support the stock markets, the consumer confidence is starting to erode and high oil prices probably have something to do with it.”

Zhang and other Standard Bank analysts said key economic data releases and monetary policy decisions in major economies are due this week, including the US non-farm payroll statistics on Apr. 1. “Our real interest lies with what the labor market signals for the Fed policy in terms of liquidity. There are growing expectations that the Fed may start to reduce the size of its balance sheet and drain liquidity from the US economy sooner rather than later. When the Fed drains liquidity, it will be bearish for commodities in general and for gold specifically…followed by crude and then the base metals,” they said.

However, they noted, “The Fed's balance sheet is only a third of global liquidity (as we measure it)…. Therefore, if the Fed contracts its balance sheet by 5%, global liquidity declines by only 1.5%.”

The European Central Bank is expected to raise interest rates on Apr. 7. “While we believe the move is widely anticipated, the greatest initial impact for commodities, we believe, may come via the exchange rate. Higher interest rates in Eurozone may support the euro vis-a-vis the dollar and provide support for commodities on the downside,” said Standard Bank analysts.

In the Eurozone, Sieminski said, “We believe the state election in Baden-Wuerttemberg will ultimately lead to a radical reordering of Germany's nuclear-energy policy and an accelerated schedule for the permanent shutdown of some or all of Germany's 17 nuclear reactors. Meanwhile, the interruption of Libyan gas to Italy tightens the European supply picture.”

US inventories
EIA officials reported Mar. 30 commercial US crude inventories were up 2.9 million bbl to 355.7 million bbl in the week ended Mar. 25, exceeding the Wall Street consensus for a gain of 1.5 million bbl. Gasoline stocks fell 2.7 million bbl to 217 million bbl, more than the 2 million bbl loss analysts expected. Both finished gasoline and blending components inventories were down. Distillate fuel inventories gained 700,000 bbl, compared with Wall Street’s expectation of a 1 million bbl decline.

The American Petroleum Institute earlier reported a 5.7 million bbl jump to 356.4 million bbl in US crude stocks for the same period, with gasoline inventories down almost 2 million bbl to 220.4 million bbl and distillate stocks retreating 112,000 bbl to 154.9 million bbl.

Imports of crude into the US gained 141,000 b/d to 9.1 million b/d, according to EIA figures for last week. In the 4 weeks through Mar. 25, crude imports averaged 8.8 million b/d, down 70,000 b/d from the comparable period in 2010. Gasoline imports (including both finished gasoline and blending components) averaged 884,000 b/d last week with distillate fuel imports averaging 243,000 b/d.

The input of crude into US refineries declined 17,000 b/d to 14.3 million b/d in the latest week with units operating at 84.1% of capacity. Gasoline production dropped to 8.7 million b/d while distillate fuel production decreased to 4.2 million b/d, EIA reported.

Sieminski said, “The devastating earthquake in Japan has resulted in the tightening of the refining balance from both a supply and demand perspective. This leaves markets with less surplus capacity and implies a better margin environment for 2011. The tightness of China's refining balance adds a further bullish dimension to this year's outlook.”

Energy prices
The May contract for benchmark US light, sweet crudes gained 81¢ to $104.79/bbl Mar. 29 on the New York Mercantile Exchange. The June contract advanced 76¢ to $105.32/bbl. On the US spot market, WTI at Cushing, Okla., was up 81¢ to 104.79/bbl in step with the front-month futures price.

Heating oil for April delivery increased 1.66¢ to $3.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed by 1.84¢ to $3.05/gal.

The expiring April natural gas contract fell 13.4¢ to $4.24/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost part of its gain from the previous session, down 6.4¢ to $4.28/MMbtu.

In London, the May IPE contract for North Sea Brent crude was up 36¢ to $115.16/bbl. Gas oil for April dropped $3.25 to $978.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes declined 50¢ to $109.87/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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