MARKET WATCH: Oil price falls after touching $75/bbl ceiling

The front-month crude contract dropped more than $2/bbl after briefly touching but failing to crack the $75/bbl barrier in intraday trade Aug. 25 on the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 26 – The front-month crude contract dropped more than $2/bbl after briefly touching but failing to crack the $75/bbl barrier in intraday trade Aug. 25 on the New York market.

In its first loss in six sessions, crude dropped more than 3% “on both fundamental factors (a strengthening US dollar and signs that reduced Chinese lending may dampen demand) as well as technicals (failure to break through the key $75/bbl level),” said analysts in the Houston office of Raymond James & Associates Inc. While equities and crude have been rising and falling in tandem for weeks, they noted, the Aug. 25 sell-off “occurred despite the modest gains in equities amid a report showing increased consumer confidence.” The New York-based Conference Board reported the first gain in its confidence index in 3 months, up to 54.1 for August from 47.4 in July and a record low of 25.3 in February.

The price continued declining in after-hours electronic trading when the American Petroleum Institute estimated US crude inventories increased 4.35 million bbl to 346.7 million bbl in the week ended Aug. 21—its first reported gain in 4 weeks. API also said gasoline stocks fell 1.8 million bbl to 209.7 million bbl, and distillate stocks declined 146,000 bbl to 160.9 million bbl in the same period.

US inventories
However, the Energy Information Administration under the Department of Energy said Aug. 26 commercial US crude inventories increased 200,000 bbl to 343.8 million bbl during the week ended Aug. 21. Gasoline stocks dropped 1.7 million bbl to 208.1 million bbl in the same period, while distillate fuel inventories gained 800,000 bbl to 162.4 million bbl. The consensus among Wall Street analysts was for declines of 1.2 million bbl in crude and 800,000 bbl in gasoline and for a 400,000 bbl increase in distillate fuel.

Imports of crude into the US increased 1.1 million b/d to 9.2 million b/d last week, EIA said. Over the 4 weeks through Aug. 21, US crude imports averaged 9 million b/d, down 1.2 million b/d from the same 4-week period in 2008. Input of crude into US refineries dipped 21,000 b/d to 14.5 million b/d last week with units operating at 84.1% of capacity. Gasoline production increased to 9 million b/d. Distillate fuel production increased to 4 million b/d.

Prior to the EIA report, Olivier Jakob at Petromatrix, Zug, Switzerland said, “The API report cannot be seen as overly supportive as the crude oil builds are partially offsetting the large draws of the previous week, thus providing no fear of a trend. Nonetheless, we need to note that there was a 1.8 million bbl crude oil build in the discounted Petroleum Administration for Defense District (PADD) 5 [on the West Coast], which then leaves a 2.5 million bbl build in the PADDs that count.”

Also, API gasoline stocks of the previous week were revised lower by 1 million bbl, “which together with the 1.8 million bbl draw of this [latest] week makes gasoline stocks lower by 2.9 million bbl from the levels reported a week ago but in line with the DOE number of last week,” Jakob said. “Hence, overall this was not the set of data that would have been required for a blind attack at [the current crude futures market ceiling price of] $75/bbl.”

Jakob said, “Technically, $75/bbl was a brick wall. The problem for the bears, however, is that we have seen recently a series of rapid 1-day sell-offs, but they were invariably followed by rebounds that were as strong. Panic selling at the bottom of the $3/bbl, 1-day correction in July and earlier this month has been the wrong trade, and it is questionable whether enough selling would come below $70/bbl if the equities are holding and the dollar index is not strengthening.”

The EIA report showed refined product inventories (gasoline plus distillate plus jet fuel) declined 1.9 million bbl (0.5%) last week due primarily to reduced production. Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “While this headline data appears somewhat positive for refiners, it is important to note that demand for refined products remains weak, down 7% vs. year-ago levels and 9% below the same calendar week of 2007. We remain cautious on the near term outlook for the refining sector, and believe the third quarter will be another difficult quarter for refiner earnings.”

Rousseau noted EIA regional data showed continued low production levels (75% utilization rate) and falling gasoline and distillate inventories on the West Coast, which should help improve refining margins in this region in the coming weeks. “Similarly, East Coast refinery utilization rates fell sharply last week (from 75% to 67%) reducing inventory levels. Lower supply could also improve refining margins on the East Coast in future weeks,” he said.

In other news, China Construction Bank Corp. reported asset bubbles in China due to excess cash in the system, indicating lenders may reduce credit.

The US Department of Commerce said Aug. 26 that sales of new US homes surged 9.6% in July—more than expected and the fourth consecutive monthly increase. Analysts say the housing market apparently is climbing back from the historic bottom early this year. The monthly increase was greater than expected and the fourth in a row and it was spurred by a decrease in the price of homes.

Energy prices
The October contract for benchmark US light, sweet crudes dropped $2.32 to $72.05/bbl Aug. 25 on the New York Mercantile Exchange. The November contract fell $2.30 to $72.78/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.27 to $71.55/bbl. Heating oil for September lost 6.75¢ to $1.86/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 4.21¢ to $2.01/gal.

The September natural gas contract dropped 4.1¢ to $2.88/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., bumped up 14.5¢ to $2.87/MMbtu.

In London, the October IPE contract for North Sea Brent crude lost $2.44 to $71.82/bbl. Gas oil for September was down $7.50 to $603/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $1.18 to $71.71/bbl on Aug. 25.

Contact Sam Fletcher at samf@ogjonline.com.

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