MARKET WATCH: Oil prices rebound; modest increase in gas price

Oil prices rebounded strongly May 18 with the front-month crude contact up 3.3%, climbing above $100/bbl in the New York market with natural gas registering a modest gain on forecasts for warmer-than-expected weather.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 19 -- Oil prices rebounded strongly May 18 with the front-month crude contact up 3.3%, climbing above $100/bbl in the New York market with natural gas registering a modest gain on forecasts for warmer-than-expected weather.

Some analysts were quick to credit the escalation of oil prices to bullish weekly US oil inventory data from the Department of Energy’s Energy Information Administration. It reported commercial US crude inventories were unchanged at 370.3 million bbl in the week ended May 13, despite a Wall Street consensus for an increase of 1.7 million bbl. Gasoline stocks inched up by 100,000 bbl to 205.9 million bbl in the same period, far short of analysts’ expectations of a 1 million bbl increase. Distillate fuel inventories fell 1.2 million bbl to 143.1 million bbl vs. an outlook for a 300,000 bbl increase (OGJ Online, May 18, 2011).

However, Olivier Jakob at Petromatrix in Zug, Switzerland, claimed that explanation “is a classic example of retrofitting analysis.” The upward trend in oil prices started prior to the EIA report, which “was not a game changer, to the contrary,” he said.

“The DOE report is showing total US implied oil demand on the 4-week average down 500,000 b/d vs. last year or 2.9%,” said Jakob. “The trend, however, is getting worse as the 3-week average is showing total US implied oil demand down 1.1 million b/d vs. last year (5.8%), and on a rolling basis we expect that the 4-week average will show such a drop in the DOE report next week.”

Demand, refinery runs
Jakob added, “The drop in US oil demand dwarfs the increase in oil demand from China, and the drop of US oil demand is about equal to the lost exports from Libya.”

He said, “We expect that the concerns about the price impact on oil demand will come back with the DOE report of next week when the drop of demand will become much more apparent. The 3-week average of US oil demand is even lower than in 2009.”

Moreover, implied demand for clean petroleum products on the 4-week average is down 2% compared with a year ago, with gasoline down 2.3%. “The trend is going down when it usually goes up at this stage of the season,” Jakob noted.

“US refinery capacity utilization rates remain very low, but if US refineries are not running any higher, it is simply because the US demand for oil products is currently inexistent,” said Jakob. “US demand for oil product is down 1.1 million b/d vs. last year and as a consequence US refinery runs are down 1 million b/d below the levels of a year ago. Current US oil demand is comparable to the levels of 2009, and the refinery capacity utilization rates are down to the levels of 2009. With the low requirements for high refinery runs, the stocks-days-of-runs in crude oil have risen to the highest levels for the season since 1992.”

Given the lack of US demand, Jakob said, “If US refineries run at higher rates they will either have to export gasoline and diesel at much greater rates or face a sharp fall in domestic margins, which in turn will lead to refinery run cuts. At recent prices the US demand for oil products has simply disappeared. It was a risk that was identified; the numbers are now starting to confirm the risk.”

Jakob reported, “The Standard & Poor’s 500 Index managed to close higher by 0.88% yesterday and was mostly driven up by the energy (up 2.02%) and material (up 2.23%) sectors.” He said, “We…are growing increasingly concerned at the over-dependence of the S&P on high oil prices to gain access to higher ground. The higher oil prices end up being a tax on the consumer to maintain a support on the S&P. However, at a certain price level the exercise starts to have too great an impact on the consumer and the efforts to maintain the trend in the S&P become antigrowth.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said “Product cracks generally weakened as products failed to match the strengthening crude prices. Following flat prices, the term structures for West Texas Intermediate and North Sea Brent also strengthened. Volatility has come down slowly during the pass few trading sessions but remains at a relatively high level.”

In the financial market, Zhang said, “The euro appears to have bottomed out the recent rapid decline vs. the dollar on the back of some weaker-than-expected US economic data. So far this week, US industrial production, housing starts, and the empire manufacturing survey all disappointed the market and show signs of slowing in US recovery. The sentiment of the oil market is likely to be biased on the cautious side while watching for clearer signs on US economic health.”

He observed, “The oil market is torn between continuously tightening [fundamentals] and signs of weakness in the US recovery. Total US inventories have declined significantly since the beginning of March.” The June 8 meeting of the Organization of Petroleum Exporting Countries “is unlikely to revise its quotas high enough to account for all the supply loss from Libya, given the hawkish stance among some of the key members. On the other hand, a weak US economy could drive the price much lower, as the very long speculative length exits the oil market en masse. On balance, we see further upside risks in oil prices as well as volatilities,” said Zhang.

At the close of the May 18-19 regular quarterly meeting of the IEA governing board, officials said, “Despite a near-10% correction since May 5, oil prices remain at elevated levels driven by market fundamentals, geopolitical uncertainty, and future expectations.” They expressed “serious concern that there are growing signs that the rise in oil prices since September is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates. As global demand for oil increases seasonally from May to August, there is a clear, urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market.”

IEA officials noted, “Additional increases in prices at this stage of the economic cycle risk derailing the global economic recovery and are neither in the interest of producing nor of consuming countries.” They urged “action from producers that will help avoid the negative global economic consequences which a further sharp market tightening could cause.”

They added, “We stand ready to work with producers as well as nonmember consumers; in this constructive spirit, we are prepared to consider using all tools that are at the disposal of IEA member countries.” Although not specified, one such tool might be release of oil from strategic reserves held in storage by developed nations.

Energy prices
The June contract for benchmark US sweet, light crudes jumped $3.19 to $100.10/bbl May 18 on the New York Mercantile Exchange. The July contract gained $3.13 to $100.56/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.19 to $100.10/bbl.

Heating oil for June delivery climbed 6.08¢ to $2.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.62¢ to $2.96/gal.

The June contract for natural gas advanced 1.6¢ to $4.20/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7¢ to $4.13/MMbtu. EIA reported May 19 the injection of 92 bcf of natural gas into US underground storage in the week ended May 13, slightly above the Wall Street consensus for a 90 bcf injection. That increased working gas in storage above 1.9 tcf. Stocks were down 235 bcf from a year ago and 36 bcf below the 5-year average.

In London, the July IPE contract for Brent crude gained $2.31 to $112.30/bbl. Gas oil for June was up $24.25 to $914.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased 80¢ to $107.40/bbl.

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