MARKET WATCH: Inventory reports undermine oil, gas prices

Energy prices fell Dec. 2 with crude giving back most of its gains from a two-session rally in the New York market following reports of an unexpected build in US oil inventories.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 3 -- Energy prices fell Dec. 2 with crude giving back most of its gains from a two-session rally in the New York market following reports of an unexpected build in US oil inventories.

The front-month crude contract “could retest the lower end of the $75-$80[/bbl] trading range,” said analysts at Pritchard Capital Partners LLC in New Orleans. However, they said, “New incremental demand for crude and related products will come from the developing world and although this [latest government inventory] report is important for the price of crude, its significance is not as great as it once was.”

The Energy Information Administration reported commercial US benchmark crude inventories increased by 2.1 million bbl to 339.9 million bbl in the week ended Nov. 27, surprising Wall Street analysts who were expecting a draw of 500,000 bbl. Gasoline inventories jumped by 4 million bbl to 214.1 million bbl. Distillate fuel inventories dropped 1.2 million bbl to 165.7 million bbl, still above average for the time of year (OGJ Online, Dec. 2, 2009).

“US demand for petroleum products continues to be inexistent,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The US economy is supposed to be recovering, but the oil demand 4-week average is still lower then the crisis level of last year and…over the last 3 months demand has been on average revised lower by 420,000 b/d from the weekly estimates. Compared [with] 2007, US oil demand is still lower by at least 2 million b/d, and this should continue to put pressure on US refiners to either cut runs or keep the structure weak enough to ensure further demand from floating storage.”

He said, “US gasoline demand is down about 260,000 b/d from the levels of 2007 while ethanol blending is higher by about 300,000 b/d; the US is exporting about 300,000 b/d of distillates compared [with] about none in 2007. There are no apparent signs that US refiners will have other options then to keep on curtailing refinery runs, and if that does not come by choice, it will come by force (e.g. Valero Energy Corp., Sunoco Inc. shutting down capacity).”

Jakob said, “Our focus on crude oil remains primarily on the growing Cushing[, Okla., inventory] cushion. Stocks in Cushing have been reported higher by about 1.4 million bbl each week for the last 4 weeks (that makes a total 4-week build of 5.3 million bbl) and at the current fill-up rate they would reach their previous peak in 2 weeks from now, just in time for the expiry of the January West Texas Intermediate contract. Imports of Canadian crude oil into the US Midwest have reached an all time high on the 4-week average, and given the full contango on WTI we should expect to see a continuation in the recent trend of rising stocks in Cushing.”

Rare gas injection
In a rare event for this time of year, the EIA reported the injection of 2 bcf into US underground storage in the week ended Nov. 27. That increased working gas in storage to 3.837 tcf, up 470 bcf from a year ago and 487 bcf above the 5-year average. The front-month gas contract price was already down 5% in the session prior to that Nov. 3 report.

Even prior to the EIA report, analysts at Energy Solutions Inc., Verona, Wis., said, “For the first time in a long time, the front-month futures contract is trading at a discount to physical prices in Louisiana. In fact, the January 2010 natural gas [New York market] contract has fallen to below $4.60/MMbtu, which is its lowest trading level since October 2004. The price weakness is primarily due to moderating forecasts from the National Weather Service that indicate once this cold stretch passes, much of the nation will return to normal temperatures in the 8-14 day outlook.”

Energy Solutions analysts observed, “Natural gas prices rallied around Thanksgiving as anticipated. Historically, this price rally continues into December, but so far that hasn’t been the case this year. We continue to focus on the potential first quarter low as a long-term buying opportunity. The market has shown that it can decline by 40¢/MMbtu one day and rally by the same amount the next; thus buyers should make sure they are ready to buy for not only 2010, but also 2011 and maybe even 2012.”

In other news, Russia retained its title as the world's largest oil producer, ahead of Saudi Arabia, with a record output of 10.07 million b/d of crude in November. “Russian output has now hit record levels for the fourth consecutive month,” said analysts in the Houston office of Raymond James & Associates Inc. “Russian output declined in 2008 but has reversed course this year due to a more benign tax regime and the benefit from the start-up of new fields in remote areas of eastern Siberia and the Arctic. Bottom line: The strength in Russian oil production has been a surprise to us given the downward trend in recent years. We expect it will be difficult for Russia to continue to grow [or even] maintain production given the decline rates of its maturing oilfields and lackluster foreign investment.”

Energy prices
The January contract for benchmark US light, sweet crudes fell $1.77 to $76.60/bbl Dec. 2 on the New York Mercantile Exchange. The February contract dropped $1.60 to $78.17/bbl. On the US spot market, WTI at Cushing was up $1.77 to $76.60/bbl. Heating oil for January delivery declined by 4.16¢ to $2.04/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month lost 4.95¢ to $1.99/gal.

The January natural gas contract continued its fall, down 23.2¢ to $4.53/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 29¢ to $4.65/MMbtu.

In London, the January IPE contract for North Sea Brent crude lost $1.47 to $77.88/bbl. Gas oil for December dropped $16 to $617.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 57¢ to $77.31/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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