MARKET WATCH: Energy prices continue resurgence

Energy prices continued to climb with crude regaining much of its loss from a 9-day downturn to close above $72/bbl Dec. 16 on the New York market on a bullish report of reduced inventories of crude and distillate fuel.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 17 -- Energy prices continued to climb with crude regaining much of its loss from a 9-day downturn to close above $72/bbl Dec. 16 on the New York market on a bullish report of reduced inventories of crude and distillate fuel.

The Energy Information Administration reported 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. 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 (OGJ Online, Dec. 16, 2009).

On Dec. 17, EIA reported the withdrawal of 207 bcf of natural gas from US underground storage, above the Wall Street consensus as a result of cold weather over most of the nation in the week ended Dec. 11. That dropped the amount of working gas in storage to 3.566 tcf. However, that’s 381 bcf above year-ago levels and 433 bcf above the 5-year average.

Oil was down in early trading Dec. 17 in response to “the strengthening dollar, which is up after the Federal Reserve forecast an economic recovery and a leveling off of labor market deterioration,” said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, they said, “The first real signs of the winter season have given life to natural gas prices, which are up roughly 12% over the last 6 trading days. As a result, energy stocks have outperformed the broader market.”

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Refined product inventories (gasoline plus distillate plus jet fuel) fell 3.5 million bbl (down 0.8%) last week due primarily to improved demand, which reached the highest weekly level since May. Consumption of jet fuel (1.66 million b/d) was the highest weekly level of the year, and demand for distillate (3.79 million b/d) was the most in a week since April. While we view these data points as positive, it is important to remember that refiners are operating well below capacity (80% utilization rate) and could easily ramp up production if refining margins improve materially. We continue to expect very weak fourth quarter earnings for the refiners.”

He noted, “The EIA regional data showed another week of falling utilization rates in the Rocky Mountains, which have declined by a total of 10% over the last 2 weeks (to 77%). We expect this to reduce production and inventory levels in the coming weeks and potential increase refining margins in the region.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, however, “Despite the stock reduction we will not consider the [EIA] report as fundamentally supportive for crude oil. First, of the overall crude stock draw, 2 million bbl of it was in the discounted West Coast (Petroleum Administration for Defense District 5). Second, Cushing, Okla., continues to build, although at a slightly slower pace [in the EIA report] than in [the American Petroleum Institute’s earlier projection] but is still basically at the peak levels of February. Third, the low imports and stock draws in the US Gulf (PADD 3) were to be expected on the combination of the weather disruption (fog) and potential tax camouflage for the end of the year. There was again some fog disruption this week and the PADD 3 end-of-year destocking is not necessarily over, but it falls in a very seasonal and systematic pattern, which is then met by a reversal build up of stocks in January and February.”

Some cargoes of crude in storage aboard very large crude carriers off Europe “are apparently currently putting sail to the US, so we have to expect that [we] will again see a reversal build of stock in January,” he said.

Jakob said, “The US has turned colder and while the weather will be part of the explanation for the reduction in distillates stocks, we are not sure that this is the full story. Stocks of distillates in the East Coast (PADD 1) have dropped by 1.9 million bbl during the week, but stocks of gasoline have build by an opposite 1.8 million bbl. On a combined basis, stocks of heating oil and gasoline are at such a high level that it is close to materially impossible to build one without drawing the other, and given that there are additional stock layers of distillates sitting at anchor off the East Coast, we would want to see some stronger distillates plus gasoline draws before believing that the US refinery margins have some recovery potential.

The overall stock reduction of crude and all products was rather large, he said, with relatively large draws in propane (4 million bbl), kerosene (1.5 million bbl) and “unfinished oils” (1 million bbl) making for an overall 12.6 million bbl draw. “Implied demand is, however, still on the low side, still lower than a year ago and given that last year demand was already in the suffering mode, it is still on the 4-week average about 1.8 million b/d below the levels of 2007,” Jakob said.

Meanwhile, US crude production is up 480,000 b/d from a year ago while Canadian crude imports into the Midwest are higher by 210,000 b/d. “Hence the US has been more than able to replace the lost Mexican production (about 220,000 b/d) without having to call on the Organization of Petroleum Exporting Countries,” said Jakob.

Oil prices maintained an $80/bbl level during November but fell below $70/bbl in an extended decline through early December. “In the short-run, we remain cautious due to the specter of still-high domestic inventories. However, incremental supply projects continue to be delayed, which should constrict long-term supply (bullish long-term picture),” said Raymond James analysts.

They said, “Natural gas remains extremely volatile. While prices have recently been range-bound between $4.50-5.50/Mcf, gas is up 10% so far in December and threatening to break out higher. We've recently begun withdrawal season, and the upcoming EIA-914 production number will likely show a significant fall sequentially (though we would argue this is largely due to additional shut-ins). However, calls for a frigid December could provide additional tailwinds for natural gas.”

At the United Nations climate-change conference in Copenhagen, representatives of the Washington, DC-based free-market National Center for Public Policy Research were handing out hundreds of candy suckers with the caption "Sucker for CO2 Limits" on Dec. 17.

“They say a sucker is born every minute, and looking around here, I'd have to say they're right,” said David A. Ridenour, vice-president of the National Center for Public Policy Research. “In the midst of the worst global economic downturn in decades, delegates are actually pressing for additional commitments for carbon reductions that would sap economic strength further.” NCPPR contends that efforts to reduce emissions have not only proven expensive, but ineffective in reducing emissions.

In other news, Iran's Defense Minister announced successful tests of Sajjil-2, a solid-fuel missile capable of hitting targets 1,200 miles away. “Although the defense minister told media that ‘They will never be [used] against any country,’ let's just say we're a little skeptical,” said Raymond James analysts. “The missile test follows the normal archetype of multilateral negotiations with Iran, which typically consists of a back-and-forth with Tehran followed by needless military muscle flexing. Bottom line: With an end-of-year deadline approaching for deal talks, Washington's arsenal mostly consists of…you guessed it, more unilateral sanctions.”

Energy prices
The January contract for benchmark US sweet, light crudes climbed as high as $73.55/bbl in intraday trading before closing at $72.66/bbl, up $1.97 Dec. 16 on the New York Mercantile Exchange. The February contract gained $1.69 to $74.38/bbl. On the US spot market, West Texas Intermediate at Cushing was up $1.97 to $72.66/bbl. Heating oil for January delivery escalated by 6.25¢ to $1.97/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.88¢ to $1.87/gal.

The January contract for natural gas dropped 6.1¢ to $5.46/MMbtu on NYMEX. On the spot market, however, gas at Henry Hub, La., gained 16.5¢ to $5.56/MMbtu.

In London, the January IPE contract for North Sea Brent was up $1.50 to $73.55/bbl. Gas oil for January increased $13 to $603.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased $1.33 to $72.17/bbl on Dec. 16.

Contact Sam Fletcher at samf@ogjonline.com.

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