MARKET WATCH: Crude rebounds above $70/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 13 -- The price of crude rebounded above $70/bbl Aug. 12 in the New York market as traders ignored a weekly government report of an inventory increase and focused instead on a weaker dollar and a rise in equity markets.

“If there was ever any question as to what's been driving oil prices lately, fundamentals or the broader market and the dollar, yesterday provided the answer. With the broader market up more than 1% and the dollar weakening, oil rose 1% to back over $70/bbl after shrugging off a bearish Department of Energy report that showed a larger than expected build in petroleum inventories and noticeably weaker demand,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas prices, on the other hand, fell 1.8% as we continue to march towards full storage over the next few months. Nevertheless, the bulls have yet to throw in the towel as we enter the peak of hurricane season and they continue to look for hope to spin off the coast of Africa.”

DOE’s Energy Information Administration reported commercial inventories of benchmark US crudes increased by 2.5 million bbl to 352 million bbl in the week ended Aug. 7. Gasoline inventories fell 1 million bbl to 211.9 million bbl during the same period. Distillate fuel inventories increased by 800,000 bbl to 162.3 million bbl (OGJ Online, Aug. 12, 2009).

Earlier the American Petroleum Institute reported an unexpected decline of 1.42 million bbl in crude stocks to 348.5 million bbl. Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The weekly stock builds in the DOE report were not inspiring, but the issue of data accuracy is starting to rise again as the API is showing a declining trend in crude stocks for the last 2 weeks and the DOE is showing the opposite. In particular the API has crude stocks in the key Midwest (Petroleum Administration for Defense District 2) 2.3 million bbl below the levels shown in the DOE weekly report. We do not know which of the two is more correct, but the discrepancy in the data is making it a bit harder to put a conviction trade on the oil fundamentals, and by default this will give greater weights to trading the exogenous inputs.”

In New Orleans, analysts at Pritchard Capital Partners LLC observed implied gasoline demand fell to 9.1 million bbl from 9.35 million bbl, which is “disappointing as the US is in the midst of the peak vacation period.” In addition, they said, “The CEO of BHP Billiton Ltd. also made comments that the Chinese commodity restocking is largely complete, and now Chinese commodity demand will be driven by ‘real-end user purchasing.’ It is unclear as to whether he was referring to all commodities or just materials and will the ‘real-end user’ demand match the restocking demand. It was surprising that the comments on China and the weak US gasoline demand did not have a negative impact on the crude price.”

On Aug. 13, EIA reported the injection of 63 bcf of natural gas into US underground storage—down from an expected injection of 66 bcf. The amount of working gas in storage increased to 3.15 tcf, up 592 bcf from the storage level a year ago and 517 bcf above the 5-year average.

Pritchard Capital Partners reported gas prices were up in early trading Aug. 13, after falling in the previous session. “Natural gas could find support simply because the US is entering hurricane season, and although predictions remain light for hurricane activity, two tropical weather systems have developed to date,” they said.

Meanwhile, EnCana Corp. officials said in a presentation at a week-long energy conference in Denver that gas prices could return to a $6-7/Mcf as input costs increase in 2010 and that natural gas could play a far more important role in the power generation and transportation markets in the future, driving down emissions of most greenhouse gases and driving prices up from depressed levels. EnCana is North America’s largest gas producer with proven reserves of 19.7 tcf and 23 million acres. Pritchard Capital analysts noted focus areas for shale commercialization are emerging plays in the Haynesville, Niobrera, and Pearsall shales.

In other news, at the end of a 2-day conference of Federal Reserve officials, Chairman Ben Bernanke said recent government and business data indicate “economic activity is leveling out.” Fed officials said they will continue holding a key banking lending rate at a record low near zero for “an extended period” to aid an economic recovery.

Energy prices
The September contract for benchmark US sweet, light crudes gained 71¢ to $70.16/bbl Aug. 12 on the New York Mercantile Exchange. The October contract increased 66¢ to $72.01/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 71¢ to $70.16/bbl. However, heating oil for September delivery dropped 1.96¢ to $1.89/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 1.69¢ to $2.03/gal.

The September natural gas contract lost 6.2¢ to $3.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 10.5¢ to $3.37/MMbtu.

Analysts at Energy Solutions Inc., Verona, Wis., said, “The September natural gas NYMEX contract has traded in a tight range of $3.50-4/MMbtu for much of the past week. Crude oil prices also seem to be confined to a trading range of $69-71/bbl. The past 1½ weeks of trading has basically corrected a quick price rally that took the September natural gas NYMEX contract to $4.162/MMbtu on Aug. 3. Hotter weather has provided some price support, but the momentum seemed to turn downward following the EIA storage report…which showed a 66 bcf injection for the week ending July 31. Despite some lingering hot temperatures and the development of several tropical waves off the western coast of Africa, natural gas prices have remained relatively weak this week.”

They said, “The one caveat at this time that could throw a wrench into all outlooks is…increased regulation of speculative positions in energy commodities. If stringent regulations are released by the government, it would likely cause a mass short-covering rally, and any bearish fundamentals would be pushed to the back burner for a while.”

In London, the September IPE contract for North Sea Brent crude gained 43¢ to $72.89/bbl. Gas oil for August was unchanged at $594.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dipped 2¢ to $71.04/bbl on Aug. 12.

Contact Sam Fletcher at samf@ogjonline.com.