MARKET WATCH: Crude price declines as US inventory rises

Crude and petroleum products prices declined Mar. 30, giving back part of their gains from the previous session in the New York market, after a federal report of an unexpected build in US crude supplies resulting in record-high storage at Cushing, Okla.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 31 -- Crude and petroleum products prices declined Mar. 30, giving back part of their gains from the previous session in the New York market, after a federal report of an unexpected build in US crude supplies resulting in record-high storage at Cushing, Okla.

The drop in the price of crude in New York “aggravated the localized disconnect with Brent, which closed the day flat,” said analysts in the Houston office of Raymond James & Associates Inc. “Relative stabilization of events” in the Middle East and North Africa (MENA) turned the markets’ attention to US inventories, they said.

“Natural gas got a boost yesterday (up 2%) on colder weather and after a shout-out from President [Barack] Obama galvanized investors about gas demand—for 2030,” said Raymond James analysts. The price of crude was up in early trading Mar. 31, while the gas price was roughly flat.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “The sentiment about natural gas improved further after President Obama touted gas as a part of his policy solution to reduce dependence on foreign oil. Although the consensus about the bigger role of gas in the nation’s future energy mix has been gradually emerging in Washington, the President’s seal of approval to such a policy is a clear sign that finally the administration is (albeit grudgingly) willing to accept gas as a cleaner, cheaper, and more readily available source of energy, and could provide the much-needed support to the industry.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Rising inventories also drove the term structures for West Texas Intermediate and Brent weaker. Gasoline cracks strengthened further after another week of sizable draws in gasoline inventories. In contrast, distillate cracks softened as seasonal distillate inventory draws subsided. However, cold weather forecast for the US Northeast for the coming days might provide temporary support to heating oil demand.”

Sharma at Pritchard Capital Partners noted, “The gasoline market became even tighter after the sixth consecutive drop in inventories.” This, he said, “will boost the refiner margins further, while the returning European demand after the seasonal maintenance of refineries would be faced with the reduction in supplies of sweeter Libyan crude, providing additional support to prices.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “President Obama announced a plan to reduce US oil imports by a third over 10 years. But why wait 10 years? The US could reduce crude oil imports by 10% by next week and 20% within 2 years if it really wanted to.”

US petroleum demand peaked 3 years ago, resulting in a surplus of refining capacity that “has transformed the US refineries over the last couple of years from a domestic-supply model to a product-export model.” Jakob reported, “The US currently burns 2.4 million b/d of crude oil for the amount of distillates it exports and about 1 million b/d of crude oil for the amount of gasoline it exports. If US refineries were not now focused on importing crude oil to export products, they could easily cut crude oil imports in a very short time by about 1 million b/d, which is the amount they import from Saudi Arabia.”

However, he said, “Running for domestic demand rather than for the export market means that some US refineries would have to shut down, and in a free market economy it is difficult to force refineries to shut down for political rather than economical reasons.”

He further noted, “The US government can announce all the measures it wants to reduce domestic petroleum demand, [but] it will not necessarily change much…as the US government does not own the US refineries.” Therefore, Jakob said, “Refineries can continue to import more crude oil to export more products.”

Jakob pointed out, “The US net import of petroleum molecules is being reduced but through an increase of petroleum product exports rather than through a reduction of crude oil imports.” In January, US exports of petroleum products reached a record high of 2.6 million b/d—“about double the 2007 levels and close to 30% of the crude oil it imports,” he said. “The US administration did not mention this achievement as the average voter would have a hard time to understand how the US is exporting a record amount of petroleum products while gasoline at the pump is over $3.60/gal.”

US inventories
The Energy Information Administration reported the injection of 12 bcf of natural gas into US underground storage in the week ended Mar. 25. That resulted in some 1.6 tcf of working gas in storage, down 12 bcf from year-ago level and 68 bcf above the 5-year average.

EIA earlier said 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 (OGJ Online, Mar. 30, 2011).

Zhang said, “Both US domestic crude production and refinery run rates remained broadly flat week-over-week, while crude imports increased further, by 141,000 b/d week-over-week to 9.13 million b/d, the highest level in 9 weeks.

The EIA reported US gasoline production dropped 330,000 b/d during the week, “which is likely to be driven by the relative weak gasoline-distillate spread seen during the past few weeks,” Zhang said. “US gasoline inventories have fallen below its 5-year average level for this time of the year, while distillate inventories remained 6% above the 5-year high and 19.4% above 5-year average. With the seasonal demand for heating oil diminishing, the large inventory overhangs in distillate are likely to put a cap on the recent rally in distillates after Japan’s earthquake.”

Energy prices
The May contract for benchmark US light, sweet crudes dropped 52¢ to $104.27/bbl Mar. 30 on the New York Mercantile Exchange. The June contract lost 48¢ to $104.84/bbl. On the US spot market, WTI at Cushing was down 52¢ to $104.27/bbl.

Heating oil for April delivery dipped 0.19¢ but closed virtually unchanged at a rounded $3.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month continued climbing, up 1.82¢ to $3.06/gal.

The new front-month May natural gas contract gained 9.2¢ to $4.36/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to decline, down 2.5¢ to $4.25/MMbtu.

In London, the May IPE contract for North Sea Brent crude slipped 3¢ to $115.13/bbl. Gas oil for April dipped 25¢ to $978/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 31¢ to $110.18/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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