MARKET WATCH: Crude prices climb, following economic signs

The front-month crude futures contract climbed back above $90/bbl Jan. 5 after falling to pre-Christmas levels in the previous New York session, maintaining its recent correlation to movements of Standard & Poor’s 500 Index.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 6 -- The front-month crude futures contract climbed back above $90/bbl Jan. 5 after falling to pre-Christmas levels in the previous New York session, maintaining its recent correlation to movements of Standard & Poor’s 500 Index.

“A stronger-than-expected private payroll report and a bullish Institute for Supply Management (ISM) nonmanufacturing data point combined to improve the economic outlook, leaving the broader market moderately higher,” said analysts in the Houston office of Raymond James & Associates Inc. “Riding the optimism of a strengthening economy, oil closed 1% higher. Energy stocks tagged along with crude and the broader market.” Natural gas fell 4.2%, however, “as investors took profits ahead of forecasts for warmer weather,” analysts said.

The US dollar jumped about 1% after Automatic Data Processing Inc.’s National Employment Report showed a 297,000 increase in US employment, well above the 100,000 gain the market had expected.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted oil also got a boost from a larger-than-expected drop in crude inventories as reported Jan. 5 by the US Energy Information Administration. Gasoline and heating oil cracks moved higher, but despite gains in both oil and product prices, most term structures continued to weaken, he said.

US inventories
EIA said US crude inventories fell 4.2 million bbl to 335.3 million bbl in the week ended Dec. 31. That was more than twice the Wall Street consensus for a 2 million bbl drop; yet crude stocks remain above average for this time of year. Gasoline inventories increased by 3.3 million bbl to 218.1 million bbl, exceeding Wall Street’s expectations for a 500,000 bbl build. Distillate fuel inventories gained 1.1 million bbl to 162.1 million bbl, also above average. Analysts were expecting only a 700,000 bbl increase (OGJ Online, Jan. 5, 2011).

The American Petroleum Institute earlier reported a 7.5 million bbl drop to 337.1 million bbl in crude stocks during that same period. It said gasoline inventories jumped by 5.6 million bbl to 222 million bbl, and distillate fuel stocks gained 2.2 million bbl to 164.9 million bbl.

On Jan. 6, EIA reported the withdrawal of 135 bcf of natural gas from US underground storage in the week ended Dec. 31. That left less than 3.1 tcf of working gas in storage. Current stocks are down 48 bcf from a year ago in the comparable period but 190 bcf above the 5-year average.

The expected smaller build in EIA petroleum product stocks than reported by API also gave the market a boost. “However, the underlying numbers between the Department of Energy’s EIA report and the API numbers from the day before appear to be much closer than the headlines suggest. Both reports showed an almost identical level of crude imports and similar falls in implied demand for gasoline and distillates, which to a large extent were weather-related,” said Zhang.

EIA data show US inventories for crude, gasoline, distillates, and total liquid oil all ended 2010 at new highs. “However, in terms of days of supply, most of the oils are about one day lower than the last week of 2009, reflecting higher demand,” said Zhang. “Despite the dip in product demand during the last week, there has been an upward trend in oil demand during the last 2 months of 2010.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The DOE data showed a further build in Cushing, Okla., [crude storage] and crude oil stocks in the Midwest were only 10,000 bbl short of the all-time high levels recorded at the end of July. Some of the stock build in the Midwest during December might have been linked to some transfer of stocks from the Gulf for tax reasons and might be transferred back to the Gulf in January, but the level of contango on West Texas Intermediate currently favors keeping the barrels in storage (the February-March contango on WTI is currently double the levels of last year, i.e. minus $1.10/bbl vs. minus 64¢/bbl on Jan. 5, 2010) and Canada will continue to push as much crude oil possible south (Petroleum Administration for Defense District 2 refiners will not complain about the margins being produced on Canadian heavy priced close to $30/bbl below WTI).”

Jakob noted, “Refinery runs on the East Coast have been trending lower over the last 3 weeks but overall US refinery capacity utilization is increasing and is back to the levels of 2007 as runs in the US Gulf Coast have increased very significantly. Stocks of crude oil in the US Gulf were down further in the last week of the year, but here again it is difficult to make a conclusion on the real stock cover situation until the second half of January when we can see how many of the barrels hidden for tax reasons start to reappear.”

Energy prices
The February contract for benchmark US sweet, light crudes gained 92¢ to $90.30/bbl Jan. 5 on the New York Mercantile Exchange. The March contract increased $1 to $91.42/bbl. On the US spot market, WTI at Cushing was up 92¢ to $90.30/bbl. Heating oil for February delivery increased 3.57¢ to $2.54/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 3.11¢ to $2.45/gal.

The February natural gas contract fell 19.6¢ to $4.47/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.9¢ to $4.52/MMbtu. In London, gas oil for January was up $9.75 to $777.50/tonne.

The February IPE contract for North Sea Brent crude gained $1.97 to $95.50/bbl—its widest premium over WTI since May, Zhang reported.

Jakob said, “We expected to see some rebalancing from WTI to Brent during the roll of the indices and given the strong widening of the WTI discount to Brent over the last 2 days we can guess there might be some front running of the rolls. For the passive investor in crude oil, the timespread structure still favors being positioned in Brent rather than WTI; transferring the positions has, however, gotten more expensive over the last 3 days.”

He said, “With Brent now at a premium of more than $5/bbl to WTI, the US Gulf differentials to WTI are also increasing both for sweet and sour barrels. However, in the North, Canadian crude oil is falling to steeper discount to WTI as Canadian stocks are building up, looking for any cubic inch of pipeline capacity to the Midwest. Canadian heavy crude oil has fallen from a discount of $19.50/bbl Dec. 31 to a discount of $27.20/bbl. Our timespread barometer has tightened very slightly with a wider contango on WTI being offset by a small increase of the front backwardation on Brent and Oman crude.”

The Organization of Petroleum Exporting Countries' Vienna office is closed Jan. 6-7 with no updates of its basket price available.

Contact Sam Fletcher at samf@ogjonline.com.

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