MARKET WATCH: Crude tops $70/bbl, ending losing streak

The front-month crude contract closed above $70/bbl on Dec. 15, snapping a 9-session losing streak on the New York market on a stronger-than-expected rise in US industrial production and an anticipated draw on US oil inventories.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 16 -- The front-month crude contract closed above $70/bbl on Dec. 15, snapping a 9-session losing streak on the New York market on a stronger-than-expected rise in US industrial production and an anticipated draw on US oil inventories.

“Crude abruptly reversed course yesterday and rose (1.7%) for the first time in 9 days. The Federal Reserve's industrial production report was one catalyst as it noted output rose 0.8% last month (the largest gain since August), helping crude overcome a robust move in the dollar, which climbed to its strongest level vs. the euro in over 2 months,” said analysts in the Houston office of Raymond James & Associates Inc. “On the natural gas front, cold weather in the Midwest and New England sent prices to an 11-month high for the fourth straight day despite bloated storage.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “US natural gas managed to confirm the break of the resistance of $5.30/MMbtu, which will now move to a level of support while the next large line of resistance is gapping to $6.10/MMbtu.”

The Consumer Price Index rose 0.4% in November from a 0.3% increase in October, the US Department of Labor reported. But for the first time core inflation, excluding energy and food, was flat after 10 consecutive monthly increases. As a result the Fed “is not expected to change interest rates but will be closely watched for tone and any hints at future policy” at the end of its 2-day meeting Dec. 16, said Raymond James analysts. Oil prices continued to climb in early trading ahead of the Energy Information Administration’s weekly report on US inventories.

Home construction rebounded in November from a drop in October, and applications for new building permits rose more than economists predicted. Government data released Dec. 16 showed the broadest measure of foreign trade posted a sharp increase in the July-September quarter, signaling higher demand for foreign goods.

US inventories
EIA reported Dec. 16 commercial US crude inventories fell 3.7 million bbl to 332.4 million bbl in the week ended Dec. 11, exceeding the Wall Street consensus for a 2 million bbl draw. Gasoline stocks increased 900,000 bbl to 217.2 million bbl in the same week, short of Wall Street’s expectations of a 1.3 million bbl gain. Finished gasoline inventories increased while blending components decreased. Distillate fuel inventories dropped 2.9 million bbl to 164.4 million bbl, still above average for this time of year. Analysts had expected a 500,000 bbl decline.

EIA reported imports of crude into the US were down 365,000 b/d to 7.8 million b/d during the same period. In the 4 weeks through Dec. 11, US crude imports averaged 8.3 million b/d, down 1.4 million b/d from the equivalent period in 2008.

The input of crude into US refineries declined 117,000 b/d to 13.8 million b/d last week, with units operating at 80% of capacity, said EIA officials. Gasoline production decreased to 9.1 million b/d, while distillate fuel production declined to 3.7 million b/d.

The American Petroleum Institute earlier reported US crude inventories up 924,000 bbl to 332.46 million bbl, with gasoline stocks up 2.1 million bbl to 216.97 million bbl, distillate fuel inventories down 2.6 million bbl to 165.8 million bbl, and refining down to 78.6% capacity.

Prior to EIA’s weekly report, Jakob said, “The only real price negative item is the continued build of crude oil stocks in Cushing[, Okla.], which is adding another 1.5 million bbl of crude each week in a very systematic pattern. The levels of crude oil stocks in Cushing are now at par to the February peaks, and if the contango narrowed back to its level of [Dec. 11], we should nonetheless start to slowly enter into thinner layers of tank capacity in Cushing. Crude oil imports were on the low side and crude stocks in the US Gulf were reduced by another 2 million bbl but that was to be expected on the back of delays last week in the Houston Shipping Channel due to fog. The real surprise in the [API] report was with the refinery runs, which came off very sharply and are running at 78.6% of capacity compared to 81.4% last week. The MasterCard report on gasoline sales at the pump is showing 4-week average sales still up by only 0.5% vs. last year.”

Meanwhile, the US and China faced off over verification of carbon reduction numbers at the week-long world environment dispute in Copenhagen. Raymond James analysts said there is “not a chance” China will allow international verification of its pledged carbon cuts. “Chinese negotiators…see it as matter of principle,” analysts reported. “For Washington, this issue alone could be a deal-breaker, above and beyond the core question of allocating carbon cuts among countries in a way that doesn't put industrialized economies at a structural disadvantage. A group of Senate Democrats recently warned that they would block any post-Copenhagen treaty that causes damage to domestic industry. With heads of government about to start arriving in Copenhagen for the final days of talks, the odds of a comprehensive political agreement—to say nothing of a legally binding one—appear slimmer by the day.”

In other news, the US House passed a bill strengthening US sanctions against foreign companies that do business with Iran's oil industry, including those that supply Iran with gasoline.

“Iran is chronically short of refining capacity, creating a fuel import requirement of up to 40%. The US already has similar sanctions in place, but the bill would expand them in a number of ways,” reported Raymond James analysts. “All of this may be a moot point, however, because the Obama administration has signaled its opposition to the bill. The White House's strategy has been to pursue a multilateral sanctions track at the UN. While that strategy could lead to more comprehensive sanctions ‘net’ if Russia and China are included, it remains far from clear whether these countries would agree to anything other than yet another toothless resolution. If the UN route fails, then Washington would need to follow a more unilateral route (together with allies). Of course, Iran is aware of all these discussions and has embarked on a crash course to build out refining capacity, which means time is of the essence.”

Energy prices
The January contract for benchmark US light, sweet crudes escalated by $1.18 to $70.69/bbl Dec. 15 on the New York Mercantile Exchange. The February contract gained 83¢ to $72.69/bbl. On the US spot market, West Texas Intermediate at Cushing was up $1.18 to $70.69/MMbtu. Heating oil for January delivery declined 0.49¢ to $1.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.84¢ to $1.85/gal.

The January contract for natural gas was up 19.1¢ to $5.52/MMbtu on NYMEX. On the spot market, gas at Henry Hub, La., was unchanged at $5.40/MMbtu.

In London, the January IPE contract for North Sea Brent increased 16¢ to $72.05/bbl, still at a premium to WTI. Gas oil for January rose $2 to $590.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes advanced 15¢ to $70.79/bbl on Dec. 15.

Contact Sam Fletcher at samf@ogjonline.com.

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