MARKET WATCH: Gas price rises on lower-than-expected storage fill

The price of crude climbed 1.1% Apr. 14 in the New York market as the US dollar weakened 0.5%, while natural gas was up 1.6% on a lower-than-expected increase in storage.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 15 -- The price of crude climbed 1.1% Apr. 14 in the New York market as the US dollar weakened 0.5%, while natural gas was up 1.6% on a lower-than-expected increase in storage.

The Energy Information Administration reported the injection of 28 bcf of natural gas into US underground storage in the week ended Apr. 8. That resulted in just over 1.6 tcf of working gas in storage, down 137 bcf from the same period a year ago but 10 bcf above the 5-year average (OGJ Online, Apr. 14, 2011).

“Although the long-term trend in the US oil-gas ratio has been downward, [price] spikes…are not unprecedented. We expect that innovation will lead to better demand growth, but this could take some time,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC.

“Commodity strength helped energy stocks marginally outperform a flat broader market,” said analysts in the Houston office of Raymond James & Associates Inc. However, they reported both oil and gas were lower in early trading Apr. 15.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said speculation Saudi Arabia rolled back its recent increase in supplies also boosted crude prices. “Saudi Arabia recently increased supplies and created two sweeter blends to partially compensate for the loss of Libyan sweet crude supplies,” he said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted, “Oil had a mixed day yesterday as West Texas Intermediate continued its recovery, while Brent showed signs of weakness. Oil products, he said, “most followed Brent and ended the day lower, with reformulated blend stock for oxygenate blending (RBOB) gasoline holding up better than distillates on the relative strength of fundamentals. WTI structure strengthened rather sharply with June-December spread moving up by almost $1/bbl, which also appeared to have caused the WTI-Brent spread to narrow.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Most of the pricing action yesterday was on the WTI-Brent spread. WTI had reached a discount to Brent of about $15/bbl and yesterday it confirmed that at those levels some of the WTI short vs. Brent long are being reversed.”

Zhang said, “Despite the sharp decline in [European] gas oil inventories, the current stock level for gasoline remains at seasonal highs and is 31% higher than this time last year. In Singapore, the total oil product inventories declined by 304,000 bbl week-over-week…. The restart of some Japan’s naphtha cracks is likely to have started to reduce the pressure on light distillate stocks.”

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, “It is too early to call a top to crude oil prices, in our view. The market remains far from any equilibrium, supply losses have not been made good, geopolitical risk remains elevated, spare capacity is still falling, and the very limited movement along the demand curve in response to higher prices has thus far been an order of magnitude less than the supply side outages.”

Output from the Organization of Petroleum Exporting Countries “has fallen to its lowest level since May 2004 according to [EIA] estimates, with little compensation so far achieved for lost Libya exports even in quantity, let alone quality, terms,” Jakob said. “The variation in the flow of deliveries to refiners is likely to be greater, given the difficulties in replacing Libyan volumes effectively and the dislocation caused by temporary falls in Japanese refinery runs.”

He said, “The US gasoline market continues to tighten, with the latest 7 million bbl inventory draw bringing the total inventory reduction over the past 8 weeks to 32.4 million bbl, taking gasoline inventories below their 5-year average. US oil product inventories are now just 15.3 million bbl above their 5-year average, the lowest overhang since March 2009.”

Sieminski noted, “Substantial US gasoline inventory draws have left stocks so far in April at a 13 million bbl year-over-year deficit and 2.6 million bbl below the 5-year average. In our view, the large inventory draws have less to do with US demand and more to do with the Latin American gasoline balance.”

He said, “Latest oil forecasts from the International Energy Agency, EIA, and OPEC have not made substantial changes to global demand growth for 2011. However, non-OPEC supply estimates appear to be reacting positively to higher oil prices.”

On Apr. 18, the Chicago Mercantile Exchange will start to list euro-denominated contracts (swap futures) for Brent, ICE gas oil, Northwest Europe high- and low-sulfur fuel oil, and Northwest Europe gas oil. “It will be interesting to see if the euro-denominated contracts for distillates attracts some interest from European domestic operators for hedging purposes,” Jakob said, adding, “Missing from the kit in our opinion is a jet euro-denominated contract.”

In other news, Jakob said Apr. 15 the Chinese gross domestic product for the first quarter was up 9.7%, with the consumer price index (CPI) up 5.4% and at the high range of the estimate, although up “5.9% in rural areas and with the food component at 11.7%.” He said, “Chinese interest rates have not risen enough yet to keep inflation under control. The US CPI will be released later today but that number is as predictable as the Chinese GDP: officially there is no inflation in the US. However, given that unofficially the reality is a bit different, we will have to watch also today the release of the University of Michigan consumer confidence Index.”

Jakob noted, “Chinese…refinery runs were down 300,000 b/d in March vs. February but 700,000 b/d higher than a year ago. With Chinese crude oil production up 150,000 b/d vs. a year ago, the Chinese additional crude oil import requirements for refinery runs vs. a year ago in the first quarter has averaged [an increase of] 600,000 b/d, which is in line with our forecast for this year. Those levels are, however, more than half what they were in the first quarter of 2010.”

The US Department of Labor unexpectedly reported Apr. 14 weekly jobless claim reports numbers rose by 27,000 to 412,000—the highest in 2 months. That increase “poured some cold water on the expectations of an early increase in interest rates,” said Sharma.

“The [unemployment claims] number does not represent a change of scene for the slowly improving job market in the US,” said Zhang. “Rather it is a reflection of data volatility caused by quarter-end. Meanwhile, US March producer price index rose by 0.7% month-over-month, driven by high energy prices. The number came in lower than the expected 1% nevertheless, which is broadly positive for the market.”

Moreover, he said, “The Nigerian presidential election, scheduled [Apr. 16], will keep the oil market on its toes. We believe that the oil market will be in a correction mode for a while in the absence of any new headline development; then we expect the oil market to regain its upward momentum on tightening market fundamentals.”

Energy prices
The May contract for benchmark US light, sweet crudes gained $1 to $108.11/bbl Apr. 14 on the New York Mercantile Exchange. The June contract increased 99¢ to $108.70/bbl. On the US spot market, WTI at Cushing, Okla., was up $1 to $108.11/bbl.

Heating oil for May delivery, however, dropped 1.38¢ to $3.19/gal on NYMEX. RBOB for the same month slipped 0.77¢ to $3.23/gal.

The May contract for natural gas escalated 7.1¢ to $4.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 1.5¢ to $4.14/MMbtu.

In London, the May IPE contract for North Sea Brent lost 52¢ to $122.36/bbl. Gas oil for May declined $2.25 to $1,012.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased $1.20 to $117.90/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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