MARKET WATCH: Crude, product prices slip lower

The front-month crude contract slipped to just above $76/bbl Nov. 24 on the New York market among mixed market indicators.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 25 -- The front-month crude contract slipped to just above $76/bbl Nov. 24 on the New York market among mixed market indicators.

The dollar weakened, and government officials said weekly jobless claims fell below 500,000 in the week ended Nov. 21. But another government report said durable goods were down 0.6% in October. Also, the Department of Commerce revised down its estimate of US third quarter gross domestic product growth to 2.8% from 3.5%.

“Crude bulls most assuredly were not thankful yesterday for the Commerce Department's report showing that the economy grew at a much slower pace than was expected, continuing the trend of lukewarm economic reports putting oil under pressure,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude dropped 2% to its lowest settlement in 5 weeks, but energy indices like the Oil Service Index largely escaped unscathed. Volume and liquidity are likely to be down due to the [Nov. 26-29 US Thanksgiving] holidays and the inevitable overindulgence of turkey and pie this week, so extra volatility [in oil and gas storage] could make for some interesting price swings….”

In New Orleans, however, analysts at Pritchard Capital Partners LLC said, “The longer term outlook is more favorable for the price of crude as Reuters [News Service] reported that analysts predict in 2010 oil demand will rise by 1.3 million b/d, but oil output will only rise by 800,000 b/d.”

They said, “Technically oil has held the $75/bbl level, but a break [below] $75 could potentially cause crude to retest $70/bbl. However, as this is the Thanksgiving holiday week, any moves in crude or markets in general can be impacted by the reduced liquidity in markets.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “The dollar-to-oil trade was broken for the second day in row, and West Texas Intermediate was yesterday at a strong outlier to the dollar-correlation model. We have been warning for a risk of erosion in that trading theme, and we think that this breakdown in the correlation trade can continue. The game-changer is the widening of the WTI contango.”

US inventories
The Energy Information Administration said Nov. 25 commercial US crude inventories increased 1 million bbl to 337.8 million bbl in the week ended Nov. 20. That is short of the Wall Street analysts’ consensus of a 1.5 million bbl gain and the American Petroleum Institute’s earlier report of a bearish 2.6 million bbl build. Gasoline stocks were up by 1 million bbl to 210.1 bbl, above expectations of a 300,000 bbl increase. Distillate fuel inventories dropped 500,000 bbl to 166.9 million bbl, while the consensus was for virtually no change.

US crude imports increased 371,000 b/d to 9 million b/d in the same week. For the 4-week period through Nov. 20, US crude imports were down 1.4 million b/d to an average 8.6 million b/d. The input of crude into US refineries increased by 177,000 b/d to 14 million b/d last week with refineries running at 80.3% of capacity. Gasoline production increased to 9.2 million b/d while distillate fuel production dropped to 4 million b/d

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Refiners increased production levels slightly last week, which offset a modest uptick in demand. The net result was a 1 million bbl rise to gasoline inventories, according to the EIA. Distillate stocks fell slightly last week but remain well above historic averages. With refining margins near their lowest level of 2009, we expect this reduced supply trend to continue for the remainder of the year.” He reiterated that the current fourth quarter likely will be the worst quarter of 2009 for refiner earnings.

In other news, ExxonMobil Corp. will take the lead as the largest US refiner in terms of capacity, following the recent announcement by Valero Energy Corp., San Antonio, that it will permanently close its 210,000-b/d Delaware City, Del., refinery. Valero cited financial losses caused by “very poor economic conditions, significant capital spending requirements, and high operating costs (OGJ Online, Nov. 20, 2009).” The shut-down will reduce Valero's total US refining capacity to 1.82 million b/d from 2 million b/d, while ExxonMobil's capacity is 1.87 million b/d.

However, Raymond James analysts said, “The reshuffling at the top of the totem pole really doesn't matter from an economic standpoint. ExxonMobil remains by far the largest refiner in terms of worldwide capacity.”

EIA reported Nov. 25 the injection of just 2 bcf of natural gas into US storage in the week ended Nov. 20. That brought total working gas in storage to 3.835 tcf, 404 bcf higher than last year at this time and 442 bcf above the 5-year average.

Energy prices
The January contract for benchmark US light, sweet crude dropped $1.54 to $76.02/bbl Nov. 24 on the New York Mercantile Exchange. The February contract lost $1.31 to $77.19/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.74 to $74.82/bbl. Heating oil for December delivery declined 3.02¢ to $1.95/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month fell 4.04¢ to $1.94/gal.

The December contract for natural gas continued to climb, up 1.3¢ to $4.49/MMbtu on NYMEX. On the spot market, gas at Henry Hub, La., gave back part of its gain from the previous session, dropping 18¢ to $3.54/MMbtu.

Analysts at Energy Solutions Inc., Verona, Wis., noted the December gas contract expired at the end of the regular NYMEX trading session Nov. 24 just 20¢/MMbtu higher than the expiration price of the November contract in that market. “With many traders looking forward to the long [US Thanksgiving] holiday weekend, a lot of business was wrapped up early, so price moves on the day of expiration were very minimal,” they reported. “Over the past week, temperature forecasts have changed from much above to much below [average]. This helped the December gas NYMEX price climb from a settlement of $4.254/MMbtu on Nov. 18 back into the $4.40’s.

Energy Solutions analysts pointed out, “Attention will now turn to the January 2010 natural gas NYMEX contract. With storage inventories already at 3.833 tcf, any price rallies are likely to meet some very strong resistance at $5.318/MMbtu—the current peak for the fourth quarter rally. However, winter is around the corner, and the first major stretch of cold weather will cause a knee-jerk price reaction higher. When that occurs, many buyers are going to once again get nervous. The question will then be how long any price move higher will be sustained, and that answer will likely be dependent on the extent and duration of the colder weather.”

In London, the new front-month January IPE contract for North Sea Brent was down $1 to $76.46/bbl. Gas oil for December dropped $26.50 to $601.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes fell $1.51 to $75.22/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets