MARKET WATCH: Increased inventories reduce energy prices

Energy prices fell Nov. 12 as traders ignored an International Energy Agency report predicting gobal oil demand will grow in the fourth quarter and focused instead on a US Energy Information Administration report of a larger than expected increase in crude inventories during the previous week.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 13 -- Energy prices fell Nov. 12 as traders ignored an International Energy Agency report predicting gobal oil demand will grow in the fourth quarter and focused instead on a US Energy Information Administration report of a larger than expected increase in crude inventories during the previous week.

“Oil was additionally punished by a resurrection of the dollar, which made its largest advance in over 3 months, leading the Oil Service Index and the S&P Oil & Gas Exploration & Production Select Industry Index both to losses of 3% and underperforming the Dow Jones Industrial Average, which fell 0.9%,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas continued its downward slide, with the December contract falling 3%. Henry Hub cash prices…were down 9.5% as warm weather and near-full storage continue to pummel the commodity.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The fundamentals of oil are poor, but they have been poor for a while and the input of the ‘Dowlar’ was again a key driver with West Texas Intermediate staying well in line with its implied value on the euro-dollar correlation.”

Overall US demand for petroleum products remains poor. “On the 4-week average [through Nov. 6] it is down 920,000 b/d from a year ago when it was supposed to benefit from the base effect of last year’s credit crisis in the fourth quarter. Compared to the levels of US oil demand in October or November 2007, the current 4-week average is lower by 1.8 million b/d,” Jakob said.

The latest weekly data from Association of American Railroads also showed “no structural increase in demand for railcars, which are still down 12.2% vs. a year ago (despite the base effect) or down 19.6% vs. the same week in 2007,” Jakob said.

EIA reported 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, said EIA, while distillate fuel inventories increased 300,000 bbl to 167.7 million bbl (OGJ Online, Nov. 12, 2009).

Jakob said, “Weather [along] the US East Coast has been warmer than normal; stocks of middle distillates on the East Coast are at a record high for the season; and with the continued strong contango in heating oil futures, we do not see how this will change. In fact, we would not be totally surprised if some floating stocks of middle distillates would start to develop off the eastern shores of the US.”

The latest EIA report on crude and petroleum product inventories “reversed the last three reports that were positive for crude in that the reports showed draws in the three major product categories. Crude traded to the lower end of its recent trading range $76-80/bbl. The critical level for crude is $75/bbl. If crude breaks the $75 level, the commodity could retest $70/bbl,” said analysts at Pritchard Capital Partners LLC in New Orleans.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “With oil intensity (use per unit of gross domestic product) declining at circa 3% annually in the US, and GDP growth over the medium-term likely below that rate, oil demand in the US appears to be on a clear downtrend from the peak already reached in 2004-07.

EIA reported Nov. 13 the injection of 25 bcf of natural gas into US underground storage in the week ended Nov. 6. That brought the working gas in storage above 3.8 tcf and just short of a generally estimated capacity of 3.9 tcf. Current storage is up 350 bcf above the same period last year at this time and 409 bcf above the 5-year average.

Shannon Nome, an equity research analyst at Deutsche Bank, said the “robust supply outlook” from third quarter results reported by US gas producers prompted the bank to reduce its average gas price estimate to $6/MMbtu for 2011-12 from $8/MMbtu previously. This “reflects lower marginal supply cost assumptions in the prolific shale gas plays,” she said.

Nome reported, “While a few notable producers vocalized bullish 2010 outlooks for natural gas, the majority took no chances and added to their hedge books during the recent quarter. Most producers seem sanguine if not bullish on the prospect for oil prices moving into 2010, while even the staunchest gas bulls seem at least slightly unnerved by the resilience of domestic production levels, per recent government data.”

Nome said, “The E&Ps have their financial houses largely in order for now. Only one of our covered companies suffered a borrowing base reduction during the October round. Several have successfully executed dispositions and financings, substantially reducing debt vs. levels earlier in 2009. Most producers plan to maintain spending within internal cash flow (and unused bank capacity).”

Energy prices
The December contract for benchmark US light, sweet crudes dropped $2.34 to $76.94/bbl on the New York Mercantile Exchange. The January contract lost $2.27 to $77.65/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.34 to $76.94/bbl. Heating oil for December fell 6.48¢ to $1.99/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 5.22¢ to $1.94/gal.

The December natural gas contract decreased 13.3¢ to $4.37/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 38.5¢ to $3.20/MMbtu. Pritchard Capital Partners said, “Natural gas continues to grind lower on concerns that domestic E&Ps continue to boost production. Most E&Ps have raised fourth quarter production guidance, and the market is beginning to doubt that the rig count reduction will lead to a natural gas supply reduction. Counter to other E&Ps, Encana Corp. announced that it had shut-in 500 MMcfd of production in the third quarter, but it is one of the few.”

In London, the December IPE contract for North Sea Brent crude lost $1.93 to $76.02/bbl. Gas oil for November delivery was unchanged at $624.75/tonne. The gas oil contract expired at the close of trade “with a delivery of about 360,000 tonnes, which is the second-largest delivery for the year and 4.7 times over the delivery of November 2008,” Jakob said.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell 83¢ to $76.06/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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