MARKET WATCH: Energy prices climb; OPEC takes no action

The front-month crude contract increased Sept. 9 for the third consecutive session in the New York market on expectations the Organization of Petroleum Exporting Countries would not change production quotas at their Vienna meeting and US oil inventories would again drop.

Sep 10th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 10 -- The front-month crude contract increased Sept. 9 for the third consecutive session in the New York market on expectations the Organization of Petroleum Exporting Countries would not change production quotas at their Vienna meeting and US oil inventories would again drop.

Traders were right on both counts. “Energy stocks were flattish yesterday following a volatile session,” said analysts in the Houston office of Raymond James & Associates Inc. “We continue to think that the near-term fundamentals for natural gas look terrible. Looking to crude, while a near-term pullback remains a possibility, we remain bullish for 2010 and beyond.”

US inventories
The Energy Information Administration said Sept. 10 commercial US crude inventories fell 5.9 million bbl to 337.5 million bbl in the week ended Sept. 4. That exceeded the Wall Street consensus of a 1.9 million bbl decline and an earlier estimate by the American Petroleum Institute of a 3.3 million bbl draw. Crude inventories still remain above average for this time of year, however.

In the same period, US gasoline stocks increased 2.1 million bbl to 207.2 million bbl while analysts were expecting a 1.5 million bbl decline. Distillate fuel inventories were up by 2 million bbl to 165.6 million bbl, double the gain expected on Wall Street.

Imports of crude into the US dropped 481,000 b/d to 9.1 million b/d last week. US crude imports averaged 9 million b/d in the 4 weeks through Sept. 4, down 1.1 million b/d from the same period in 2008.

The input of crude into US refineries increased by 154,000 b/d to 15.1 million b/d last week, with units operating at 87.2% of capacity. Gasoline production increased to 9.2 million b/d, and distillate fuel production increased to 4.1 million b/d.

The “surprising” rise in gasoline inventories was due to higher production and lower demand compared with the prior week, said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “We expect further increases to gasoline stocks in the coming weeks since consumption typically falls sharply in the fall compared to the summer. High distillate inventories remain a negative for the sector, and this issue should become more important as winter approaches. We remain cautious on the near-term outlook for the refining sector,” he said.

Rousseau said EIA regional data showed 1 million bbl increases to both East Coast gasoline and distillate inventories due in part to rising imports. Gasoline inventories continued to decline on the West Coast where refinery utilization rates (76%) remained well below average.

EIA also reported the injection of 69 bcf of natural gas into US underground storage in the week ended Sept. 4. That boosted the working gas in storage to 3.4 tcf, up 495 bcf from the year-ago level and 503 bcf above the 5-year average.

OPEC meeting
As expected, OPEC ministers agreed not to change the aggregate production target for the 11 affected members other than Iraq. Because it is the Muslim holy month of Ramadan, the group’s Vienna meeting started at 9:30 p.m. local time Sept. 9 and continued until 1:30 a.m. Sept. 10.

At the Centre for Global Energy Studies, London, however, analysts said, “Ministers appeared remarkably relaxed about the slow deterioration in compliance with individual output quotas over the past few months, which have seen aggregate output from the OPEC-11 rise from 25.72 million b/d in March to 26.17 million b/d last month, reducing compliance from 79% to 68%, according to the CGES’ own assessments of OPEC output.”

Prior to the meeting, Saudi Arabia Oil Minister Ali I. al-Naimi dismissed concerns about over-production, “saying ‘people are complying anyway. Seventy percent [compliance] is great,’” CGES analysts reported. They also noted, “Unlike previous meetings, ministers almost went out of their way not to try to talk up the price, dismissing suggestions that it could rise to $85/bbl by the end of the year, with al-Naimi going so far as to say that ‘the price is perfect,’ adding that he did not expect to see it change much ‘for a while.’” The average price for OPEC’s basket of 12 reference crudes gained $1.14 to $68.97/bbl on Sept. 9.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “At the last meeting at the end of May…al-Naimi essentially dictated the outcome by telling everybody that economic recovery was on the way. That seemed a bit optimistic at the time but 4 months later this sentiment is more than just wishful thinking, and there is now a clear change in the economic climate towards a sunnier outlook.”

At the latest meeting, they said, “Minister al-Naimi left us in no doubt that he is confident that the rising tide of the economy will float all boats.”

However, the communique issued by OPEC at the end of the meeting was “markedly less positive,” said KBC analysts. “In OPEC’s own words, ‘whilst there are signs that economic recovery is under way, there remains great concern about the magnitude and pace of this recovery, especially in the major industrialized nations of the Organization for Economic Cooperation and Development. There has been some easing of the overhang in crude oil stocks but market fundamentals remain weak, refinery utilization rates are low and product inventories have risen considerably,’” they said.

They added, “This OPEC message is definitely more downbeat in tone than the line being fed to the media by Saudi Arabia’s oil minister, and seems to KBC Market Services to be more realistic.”

The general mood of other delegates, OPEC staff, and other analysts was “more sympathetic to the tone of OPEC’s communique than to al-Naimi’s position,” KBC reported. “It was widely noted that oil prices have struggled to break through the $75/bbl level in recent weeks with the specter of high current oil stocks a major inhibiting factor. On the downside it looks as if $60/bbl is a floor for the time being with expectations of imminent economic recovery acting as a support. But economic recovery is still fragile and almost all the risk to current oil prices is on the downside.”

CGES analysts said, “Now it seems OPEC has decided that inventories are no longer an issue. Although [OPEC Sec. Gen. Abdalla Salem El-Badri] told the press conference that the stock overhang was ‘a big concern’ for OPEC and that stricter compliance with output targets could eliminate it by the end of the first quarter of next year, his comments were out of line with the views of several of the ministers present at the meeting. The official press release, too, made little of the current stock situation, noting only that ‘there has been some easing of the overhang in crude oil stocks…but product inventories have risen considerably.’”

CGES reported, “OPEC remains concerned about the world’s need for its oil next year, forecasting another 500,000 b/d fall in the demand for crude oil from its member countries in 2010, as rising non-OPEC crude oil and biofuels production, plus increased output of NGLs by its own members more than offsets an expected 500,000 b/d increase in global oil demand.”

The next OPEC meeting will be in Luanda, Angola, on Dec. 22, followed by a meeting in Vienna on Mar. 17.

Economic indicators
In other news, a record increase of general imports in July drove the US trade deficit to its highest peak in 6 months despite the third consecutive increase in foreign demand for US products. Analysts said increased trade in both categories indicate the worst recession since the 1930s is weakening.

The Department of Commerce said Sept. 10 the US trade deficit escalated 16.3% to $32 billion in July, well above the expected imbalance of $27.4 billion. The percentage increase was the largest in more than 10 years and produced the biggest imbalance since January. Imports were up 4.7% to $159.6 billion, the second consecutive gain after 10 months of losses and the largest monthly advance since the department began keeping records in 1992. A 21.5% jump in imports of autos and auto parts was a major factor. Exports increased for the third straight month, up 2.2% to $127.6 billion.

Meanwhile, the Department of Labor reported 550,000 initial claims for unemployment benefits, down from 576,000 new claims the previous week. The number of people receiving unemployment checks declined by 159,000 to 6.1 million, the lowest since early April.

Energy prices
The October contract for benchmark US sweet, light crudes advanced 21¢ to $71.31/bbl Sept. 9 on the New York Mercantile Exchange. The November contract increased 23¢ to $71.82/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 21¢ to $71.31/bbl. Heating oil for October delivery inched up 1.19¢ to $1.79/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dipped 0.08¢ but closed virtually unchanged at an average $1.83/gal.

The October natural gas contract continued its rally, up 2.2¢ to $2.83/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 23¢ to $2.73/MMbtu.

In London, the October IPE contract for North Sea Brent crude increased 41¢ to $69.83/bbl. Gas oil for September gained $2.75 to $570.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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