MARKET WATCH: Crude, product prices rebound as dollar weakens

Oil futures recovered a portion of earlier losses with the new front-month crude contract rebounding 2.7% June 23 on the New York market in response to a weaker US dollar and concerns about further supply disruptions in Nigeria and in Iran.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 24 -- Oil futures recovered a portion of earlier losses with the new front-month crude contract rebounding 2.7% June 23 on the New York market in response to a weaker US dollar and concerns about further supply disruptions in Nigeria and in Iran.

The rebound also was helped “by comments from the Organization of Petroleum Exporting Countries Pres. [Jose Maria Botelho de] Vasconcelos reiterating OPEC’s goal to achieve $75/bbl crude by the end of 2009,” said analysts at Pritchard Capital Partners LLC, New Orleans. “His comments followed similar remarks from Saudi Arabia,” they said.

They said, “Both the European Union and OPEC [at a joint conference June 23] suggested higher oil prices were needed to avoid a repeat of the 2008 bubble as both believe higher oil prices are needed to sustain downstream investment. Finally, in the past 2 months, Venezuela has taken actions towards nationalizing their oil production, and the president of Ecuador recently made statements suggesting he is considering nationalization of their oil industry.”

Pritchard Capital Partners said, “If the US dollar continues to fade, strength in crude and commodities should continue; however, it is difficult to envision a major correction in oil considering the backdrop.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The renewed weakness [of] the dollar provided support to oil and the broader commodity complex. In our dollar correlation model, crude oil is valued at $81/bbl, and today the difficulty for oil traders will be to price the result of the [EIA] statistics knowing that they will be followed later by the result of the Federal Reserve meeting.”

While the weaker dollar was “an important contributor” to the support of crude prices, Jakob noted, “We remain as well in an environment where geopolitical concerns are not yet dissipating.” Continued violence in Iran after government and religious leaders refused to overturn the result of a disputed presidential election has prompted stronger criticism from US President Barack Obama about the election's legitimacy.

Jakob observed, “The US Administration is starting to have a stronger voice on the Iranian situation; Iran has expelled British diplomats; and the UK has expelled Iranian diplomats. We also can’t help…notice that two of the British hostages in Iraq (since 2007) were ‘delivered’ dead [June 20.] The US Army is supposed to leave Iraqi cities by the end of this month, and as the West gets louder about its support to the Iranian demonstrators, it is probable that Iran will try to show the West that it is holding a few cards in Iraq and elsewhere (it snubbed at the last minute [June 25] G8 meeting on Afghanistan to which it was formally invited).”

Jakob said, “In Iran itself the streets are not yet clear, and there is growing speculation about the organization of worker’s strike. Attacks on oil installations are not a risk we would consider, but we have to keep in mind what happened to Venezuela and the impact that ‘witch-hunting’ had on production levels. On [June 21] the Iranian deputy oil minister was fired in move widely described as political, and as long as the strife continues, we will keep a premium for the risk of Iranian supplies slowly eroding from witch-hunting and internal disorganization.”

In other news, Eni SPA declared force majeure on shipments of Brass River crude oil from Nigeria. On June 19, Eni shut in 33,000 b/d of oil and 80 MMscfd of gas production from a pipeline supplying the Brass export terminal in the Niger Delta due to sabotage (OGJ Online, June 23, 2009).

In Houston, analysts with Raymond James & Associates Inc. noted since June 18 natural gas prices have steadily trekked lower. “Could the natural gas market finally be reflecting what we expect to be a bearish summer? Perhaps, but we will wait and see,” they said.

Pritchard Capital Partners analysts reported, “Evidence is mounting that LNG will not arrive at US shores. As of June 18, 16 LNG cargoes were scheduled for delivery in the US vs. 18 for the month of May. Reports indicate that since May both China and India have stepped up LNG imports; however, LNG imports in Europe are slowing. Traders suggest watching the August and September the New York Mercantile Exchange futures for signs of weakness and indications of a possible surge in LNG imports to the US.”

US inventories
The Energy Information Administration said June 24 commercial US benchmark light, sweet crudes fell 3.8 million bbl to 353.9 million bbl during the week ended June 19. That far exceeded the Wall Street consensus for a drop of 1 million bbl and differed sharply from an earlier report by the American Petroleum Institute of a bearish 5.9 million bbl increase. US crudes remain above average for this time of year, EIA reported.

During the same week, US gasoline inventories jumped by 3.9 million bbl to 208.9 million bbl, compared with a Wall Street consensus of an increase of 1 million bbl. Distillate fuel increased 900,000 bbl to 152.1 million bbl, in line with Wall Street expectations and above average for this time of year.

Crude imports into the US increased 247,000 b/d to 9.3 million b/d in the latest week. Over the 4 weeks through June 19, US crude imports have averaged 9.2 million b/d, down 628,000 b/d from the same period in 2008. Total imports of both finished gasoline and gasoline blending components averaged 971,000 b/d in the latest week by distillate fuel imports averaged 289,000 b/d.

The input of crude into US refineries increased 354,000 b/d to 15 million b/d, with units operating at 87.1% of capacity. Gasoline production increased to 9.2 million b/d, while distillate fuel production increased to 4.1 million b/d.

The large increase in US gasoline inventories was “due to higher supply and lower demand vs. last week,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “The average US refinery utilization rate increased to 87.1%, the highest weekly total since Dec. 5. If summer gasoline demand does not materialize, higher production could result in rising gasoline inventories and downward pressure on refining margins,” he said. “On a positive note, jet fuel demand of 1.5 million b/d was the highest weekly total since Mar. 20.”

EIA’s regional data showed rising refinery utilization rates “in all regions except the Gulf Coast.” Rousseau said, “We estimate that the East Coast utilization rate increased to 82%, the highest weekly level since November. …However, gasoline imports into the East Coast remain below average (13% lower than second quarter 2008 levels to date), which has helped prevent a large rise to gasoline stocks in the region.”

Energy prices
The new front-month August contract for benchmark US light, sweet crudes regained $1.74 to $69.24/bbl June 23 on NYMEX. The September contract increased $1.71 to $70.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.86 to $68.79/bbl as it tried to adjust to the price of the new front-month futures contract. Heating oil for July delivery gained 4.15¢ to $1.77/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 3.35¢ to $1.89/gal.

The July natural gas contract dropped 5.4¢ to $3.88/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 4.5¢ to $3.92/MMbtu.

In London, the August IPE contract for North Sea Brent crude gained $1.82 to $68.80/bbl. Gas oil for July was up $2.25 to $550.25/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 80¢ to $66.61/bbl on June 23.

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