MARKET WATCH: Energy prices rise in 'quiet' holiday market

Crude prices again topped $80/bbl in “relatively quiet” intraday trading Nov. 11 in the New York market with volumes below normal because of the US Veteran's Day holiday.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 12 -- Crude prices again topped $80/bbl in “relatively quiet” intraday trading Nov. 11 in the New York market with volumes below normal because of the US Veteran's Day holiday.

“Oil prices retreated from the day's high and ended the day up slightly after the dollar rebounded from its lowest reported levels since August 2008,” said analysts in the Houston office of Raymond James & Associates Inc. “December delivery of natural gas also ended the day up marginally (0.8%) despite brimming inventories and a warmer-than-normal outlook for the next few weeks. In fact, if this warm weather continues, November might be a net build for inventories—that has only happened twice since 1975.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “West Texas Intermediate continues to be a price for the dollar rather than a price for crude oil.”

In New Orleans, analysts at Pritchard Capital Partners LLC agreed, “Oil traded in line with the US dollar. At the close of the New York Stock Exchange, the US Dollar Index was more or less flat.” Pritchard Capital analysts said, “The economy is probably not strong enough to sustain such a high crude price should the dollar continue to weaken. However, if the dollar continues to weaken into the end of 2009, crude will probably continue to trade higher.”

IEA outlook
Crude prices rose to their highest level in more than a year in October with WTI and North Sea Brent futures up an average of $6/bbl to $75.82/bbl and $73.93/bbl, respectively, the International Energy Agency in Paris reported Nov. 12. “Growing expectations for economic recovery boosted markets, with WTI reaching over $81/bbl before settling in a $75.80/bbl range by early November,” IEA said.

IEA lifted its estimates of global oil demand by 210,000 b/d for 2009 and 140,000 b/d for 2010, on stronger preliminary data in North America and buoyant demand in Asia and the Middle East. Global demand is now expected to average 84.8 million b/d in 2009 and 86.2 million b/d in 2010.

It marked the fifth consecutive month IEA raised its global oil demand forecast. “Even with an increased forecast, global oil demand is still expected to drop by 2% this year,” said Raymond James analysts.

Global oil supply rose by 635,000 b/d to 85.6 million b/d in October, with production among members of the Organization of Petroleum Exporting Countries up 110,000 b/d to 29 million b/d, the highest since January. IEA revised its projected “call on OPEC crude and stock change” for 2010, up 100,000 b/d to 28.5 million b/d as a result of increased demand and a 300,000 b/d downward revision to OPEC natural gas liquids. Its 2009 call averages 28.7 million b/d.

IEA increased its estimate of non-OPEC crude production by 130,000 b/d for 2009 and 350,000 b/d for 2010 due to stronger output from the US Gulf of Mexico, Norway, and Russia. Non-OPEC production is forecast at 51.1 million b/d in 2009 and 51.9 million b/d in 2010. October production increased 380,000 b/d to 51.4 million b/d with the end of North Sea maintenance, the agency said.

“For 2010, the IEA now expects non-OPEC production to increase by 1.6%, whereas we expect a 1.3% decline,” Raymond James analysts said.

OPEC report
In its latest monthly report Nov. 11, OPEC said it expects world oil demand to fall 1.63% to 84.31 million b/d this year. However, a general economic recovery could allow world oil demand to increase 0.9% to 85.07 million b/d in 2010, officials said.

OPEC expects the world economy to grow 2.9% next year after contracting 1.1% in 2009. It sees most of that growth occurring in emerging Asian economies like China and India. Cartel economists forecast crude demand will increase 3.7% next year in China and 3.34% in the Middle East. However crude demand is expected to fall 1.25% in Western Europe.

Meanwhile, OPEC officials warned a sustained increase in oil prices could erode crude demand within a still shaky global economy.

Jakob said, “Even if we were to use a very, very conservative estimate for OPEC production in 2010 at 29 million b/d (i.e. unchanged from October levels, which is unlikely) we would have in 2010 a higher global stock build than in 2009 or 2008. This would also result in a global implied stock build during the first half of 2010 while the implied picture was flat in the first half of 2009.”

Jakob said, “Given the current high levels of stocks, it is difficult to paint a very positive picture for 2010. Yes, there is some demand growth in China, but China is not the world. The global picture says that OPEC should really cut production to balance the stock overhang, but the higher oil prices induced by the dollar correlation trade are making OPEC to increase production instead.”

US inventories
Meanwhile, the US Energy Information Administration said Nov. 12 commercial US benchmark crude inventories increased by 1.8 million bbl to 337.7 million bbl in the week ended Nov. 6, slightly above average for the time of year. That surpassed Wall Street’s consensus of a 1 million bbl gain but was well below the American Petroleum Institute’s more bearish report of a 3.2 million bbl build.

Gasoline stocks for the same week were up 2.5 million bbl to 210.8 million, while analysts expected a 400,000 bbl draw. Both finished gasoline inventories and blending components increased last week, with the total above average. Distillate fuel inventories increased 300,000 bbl to 167.7 million bbl, also above average and in the opposite direction of analysts’ anticipation of a 700,000 bbl decrease.

Imports of crude into the US in that period were up 530,000 b/d to 8.7 million b/d. In the 4 weeks through Nov. 6, crude imports averaged 8.6 million b/d, down 1.5 million b/d from the comparable period in 2008.

Nonetheless, the input of crude into US refineries dropped 145,000 b/d to 13.8 million b/d last week with units operating at 79.9% of capacity as refiners continued to reduce utilization rates due to weak refining margins. Gasoline production decreased to 8.9 million b/d, while distillate fuel production increased to 4.1 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said it was the first time refinery utilization had dropped below 80% in recent years, “absent hurricane-related shutdowns.” He said, “With refining margins near their lowest level of 2009, we expect this lower supply trend to continue for the remainder of the quarter. The fourth quarter should be the worst quarter of the year for refiner earnings, in our view.”

Rousseau added, “EIA regional data showed a continued trend of rising West Coast gasoline inventories, which have increased 9% over the past 4 weeks. Surprisingly, despite very weak refining margins, utilization rates increased in the Rocky Mountains (from 81% to 86%) and West Coast (from 85% to 87%) regions last week, which could raise inventory levels further in those markets in the coming weeks.”

In other news, the US Minerals Management Service said Nov. 11 that crews had not yet returned to 17 of the 158 production platforms in the Gulf of Mexico that were evacuated ahead of Tropical Storm Ida. MMS officials said 4 of the 10 evacuated rigs were still without full crews.

Officials said 30.86% of the usual oil production and 7.6% of the usual gas production from the gulf remained shut in, down from 43.9% of oil production and 27.96% of natural gas production as of Nov. 10.

Energy prices
The December contract for benchmark US sweet, light crudes traded as high as $80.10/bbl Nov. 11 before closing at $79.78/bbl, up 23¢ for the day on the New York Mercantile Exchange. The January contract gained 28¢ to $79.92/bbl. On the US spot market, WTI at Cushing, Okla., was up 23¢ to $79.78/bbl. Heating oil for December delivery inched 0.35¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 1.53¢ to $1.99/gal.

The December natural gas contract climbed 3.6¢ to $4.50/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., fell 20.5¢ to $3.59/MMbtu. “Predictions for milder weather across the US in the coming week could keep natural gas price gains capped over the next week,” said Pritchard Capital Partners.

In London, the December IPE contract for North Sea Brent crude was up 45¢ to $77.95/bbl. The November gas oil contract lost $3.75 to $624.75/tonne.

Jakob said Nov. 12, “Today is the expiry of the ICE gas oil November contract, and the widening contango in the last hours of the contract says a lot about the level of distillates stocks and the warmer than normal temperatures seen so far in the Atlantic Basin. Only Asia is for now seeing a real start to winter; however if there is more snow today in Beijin than in Geneva, it is not only because of colder temperatures but also because the Chinese ‘Weather Modification Office’ is shooting silver iodide in the clouds to force more precipitation.”

The average price for OPEC’s basket of 12 reference crudes increased 39¢ to $76.89/bbl Nov. 11.

Contact Sam Fletcher at samf@ogjonline.com.

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