MARKET WATCH: Crude prices slip lower; gas price improves

Crude prices tumbled Feb. 15, with North Sea Brent giving back most of its gain from the previous session that had pushed it to its highest level since September 2008.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 16 -- Crude prices tumbled Feb. 15, with North Sea Brent giving back most of its gain from the previous session that had pushed it to its highest level since September 2008.

The March contract for natural gas was up 1.3% as the 10-15 days-out weather projections pointed to another cold front headed for the Central and Eastern US. Furthermore, Boardwalk Pipeline Partners LP’s Gulf South Pipeline had to reduce flow by 300 MMcfd to 1 bcfd Feb. 15 after its Carthage, Tex., junction compressor was damaged by a fire, providing support to gas prices, said Sharma. “Although the prices will continue to take direction from weather forecasts at least over the next few weeks, natural gas is expected to remain largely range-bound until the market sees a significant catalyst on the supply side of the story,” he said.

“Oil had a mini-rally in the morning yesterday before being dumped amid weaker US economic data,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The front-month WTI-Brent spread narrowed slightly to $17.51/bbl [in Brent’s favor] at yesterday’s close, as it appears to be profit-taking prior to March WTI option expiry today. The term structures for WTI, Brent and ICE gasoil all strengthened despite the weakness in flat prices.”

The front-month crude contract price dropped 0.6% for the day on the New York market because of a stronger dollar and concerns higher oil inventories would be reported. Brent fell 1.4%, “but the West Texas Intermediate-Brent spread remained above $17/bbl,” said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas rose just over 1% as traders covered their short positions.” They reported the price of crude was up but natural gas was down in early trading Feb. 16.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, also blamed weaker-than-anticipated retail sales data for the drop in oil prices. US retail sales gained only 0.3% in January vs. consensus of 0.5% gain, continuing the pressure on crude prices. However, Sharma said, “The biggest concerns remain around the Cushing, Okla., inventories.”

Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, “A glut of oil in the Midwest has lowered WTI crude oil prices relative to other light, sweet oils and caused refining margins in the region to spike, a significant positive for Midwest refiners. Integrated oils have little incentive to ‘solve the problem’ by reversing pipelines to send more oil to the Gulf Coast since their refining businesses are benefitting. Arbitrage opportunities should result in some oil moving from the Midwest to the Gulf Coast (via rail, truck, and barge) but the problem should continue until new pipelines (Keystone XL and Monarch) are built in 2013.”

Meanwhile, he said, “We expect lower-Midwest oil inventories to decline slightly in 2011, as higher refinery throughput volumes and oil shipped out of the region more than offsets increased domestic production and higher imports.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Technically, WTI is maintained in a negative momentum, printing lower highs and lower lows while being capped by the 5-day moving average. With WTI March expiring next week in a very wide contango, we will be focusing increasingly on the support at $87.15/bbl on the basis of April WTI and then $86/bbl also on April. On March WTI the real support will not come before the $81-82/bbl area.”

Jakob noted, “All sorts of protests are continuing in the Middle East (Bahrain, Iran) and are riding on strong media attention; this will continue to add some volatility as shown with the $7/bbl gained and lost on Egypt.”

He said, “In Europe, sales of gasoline and diesel both in Germany and France were in January significantly higher than a year ago. There is, however, some weather impact to consider given that chaos on icy roads occurred last year in January while this year the weather was very mild (the chaos was in December). Heating oil sales in Germany were in January 12% lower than a year ago.”

Chinese demand
The China Customs report on Feb. 14 indicated that country imported 21.8 million tonnes of crude oil in January, a 4.5% increase month-over-month and a hefty 27.4% increase year-over-year. “These strong imports underpin China’s record high refinery run in December of 38.7 million tonnes, or approximately 9.2 million b/d on average for the month,” said Zhang.

He said, “The high crude runs also reflect a rapid expansion of China’s refining industry. Consequently, China turned into a net diesel importer for the first time since November 2008. However, with strong domestic demand, China has also seen a steady increase in oil product imports and a decline in oil product exports during the second half of 2010.”

China Customs’ latest report reveals “China’s oil product imports came in at 3.85 million tonnes in January, slightly lower than December, but a 51.3% increase from January 2010. In the meantime, China exported 2.14 million tonnes of oil product in January, increasing 13.2% from December but falling 20.7% year-over-year,” said Zhang.

The sharp increase in product imports near the end of 2010 was partly driven by diesel demand for power generation, as many local governments rushed to meet the energy efficient targets set for the last 5-year plan. “This temporary demand increase is likely to decline as China starts a fresh cycle of its 5-year plan with a significant amount of new power generation capacity to be added this year. Nevertheless, the underlying demand growth remains strong,” he said.

As China continues to fight inflation using various monetary polices, the impact on the oil market is likely to be small, Zhang reiterated. “The growth from industrial demand is likely to be more affected than the demand growth from personal consumption, which will affect different product groups differently. Overall, we see China’s oil imports and demand remaining strong this year, which should be supportive of the oil market,” he said.

US inventories
The Energy Information Administration said Feb. 16 commercial US crude inventories increased by 900,000 bbl to 345.9 million bbl in the week ended Feb. 11, far short of the Wall Street consensus for a 2 million bbl jump. Gasoline stocks were up 200,000 to 241.1 million bbl in the same period, also well below Wall Street’s expectations of a 1.9 million bbl increase. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories dropped 3.1 million bbl to 161.3 million bbl. Analysts expected a decline of only 400,000 bbl.

Imports of crude into the US were down 643,000 b/d to 8.3 million b/d last week. In the 4 weeks through Feb. 11, crude imports averaged 8.9 million b/d, a 598,000 b/d increase compared with the same 4-week period in 2010. Total motor gasoline imports averaged 935,000 b/d and distillate fuel imports averaged 211,000 b/d in the latest week.

The input of crude into US refineries last week declined 481,000 b/d to 13.9 million b/d with units operating at 81.2% of capacity. Gasoline production increased to 9.2 million b/d while distillate fuel production decreased to 4 million b/d.

Energy prices
The March contract for benchmark US sweet, light crudes dropped 49¢ to $84.32/bbl Feb. 15 on the New York Mercantile Exchange. The April contract fell $1.16 to $87.57/bbl. On the US spot market, WTI at Cushing was down 49¢ to $84.32/bbl.

Heating oil for March delivery declined 2.14¢ to $2.73/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.86¢ to $2.49/gal.

The March contract for natural gas gained 5.1¢ to $3.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 1.5¢ to $3.91/MMbtu.

In London, the April IPE contract for North Sea Brent lost $1.44 to $101.64/bbl. Gas oil for March was down $4.50 to 867/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 76¢ to $99/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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