MARKET WATCH: Front-month crude contract falls below $70/bbl

The front-month crude contract dropped below $70/bbl Oct. 7 on the New York Mercantile Exchange following a larger-than-expected increase in US gasoline inventories and the US dollar’s rally against the euro and other key currencies.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 8 -- The front-month crude contract dropped below $70/bbl Oct. 7 on the New York Mercantile Exchange following a larger-than-expected increase in US gasoline inventories and the US dollar’s rally against the euro and other key currencies.

Meanwhile, the front-month natural gas contract topped $5/MMbtu in intraday trading for the third consecutive session but again failed to maintain that level. The $5/MMbtu price “is turning out to be a pivotal resistance level,” said analysts at Energy Solutions Inc., Verona, Wis. “A decisive move below or above the $5 level could set the tone for NYMEX prices in the next week.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “High levels of gasoline and distillate have capped the rally in crude and kept West Texas Intermediate locked around the $70/bbl level. Barring significant dollar weakness, it appears that crude will not make a new high or break out of the $70 range until the market sees evidence of working off the high inventory levels of both gasoline and distillate.”

US inventories
The Energy Information Administration reported commercial US crude inventories decreased 1 million bbl to 337.4 million bbl in the week ended Oct. 2. US gasoline climbed 2.9 million bbl to 214.4 million bbl in the same week. Distillate fuel inventories increased by 700,000 bbl to 171.8 million bbl (OGJ Online, Oct. 7, 2009).

“Production of gasoline was at the highest level of the year and makes for a larger than expected build,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Overall, the US picture has not really changed. There is not enough underlying demand, so the draws of crude oil are offset by a build of products and the combined stocks of crude and clean petroleum products are back to being close to the record highs seen earlier in the year.”

Analysts in the Houston office of Raymond James & Associates Inc. said, “Crude, gasoline, and distillate inventories are still 10%, 7%, and 30% above their 5-year averages, respectively.”

Earlier this week, the EIA revised its forecast for world oil consumption, up 200,000 b/d for the rest of 2009 and for 2010, largely because of improved expectations for Asian growth.

EIA reported Oct. 8 the injection of 69 bcf of natural gas into US underground storage in the week ended Oct. 2. That boosted the working gas in storage to 3.658 tcf, up 473 bcf from a year ago and 480 bcf above the 5-year average.

Frustrated Raymond James analysts said, “With inventories at record highs, gas prices doubling from where they were a month ago, and the prompt month continuing to rally, we will stop beating the bear drum for a while and just try and rationalize these irrational market movements.”

Record gas storage inventories “are taking a back seat to other data at this time,” said Energy Solutions analysts. “Physical prices have moved higher in conjunction with the anticipation of colder weather. Snow is expected in the Rockies by the weekend, and that colder weather is then going to make its way east.”

They said, “The market is looking for direction, and it is therefore taking direction from even slightly bullish or bearish news. That’s one reason prices are flip-flopping from 1 day to the next. Economic data seems to hold the strongest clout right now and because the only bearish factor right now is storage, a dramatic price pullback isn’t expected in the near future.”

Pritchard Capital Partners noted, “Further evidence that [exploration and production companies] are cutting activity in natural gas production came from Chevron Corp. Following comments made in July that they were slowing activity in the Piceance Basin in Colorado, Chevron announced they are ceasing all drilling activity in this region until natural gas prices recover.”

In other news, Jakob reported, “The press officer of the militant Movement for the Emancipation of the Niger Delta (MEND) threatened new attacks at the end of the self-proclaimed ceasefire (Oct. 15). However, with most of the warlords of the delta having embraced the amnesty [offered by the government of Nigeria] it is difficult to give the same credibility as before to the colorful email statements of the MEND’s press officer.”

Raymond James analysts noted an “interesting article” in The Times in the UK indicating the European Union's carbon trading policy is reducing profitability of Europe's refining and petrochemical industries and pushing industry infrastructure, associated jobs, and investment towards Russia, the Persian Gulf, and Asia-Pacific. “The article mentions three refineries in Britain alone that are on the verge of closing. Unlike depressed refining margins, which are a global issue, carbon credits are an incremental cost in Europe only—at least for now,” analysts said.

Energy prices
The November contract for benchmark US light, sweet crudes dropped $1.31 to $69.57/bbl Oct. 7 on NYMEX. The December contract lost $1.26 to $69.88/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.31 to $69.57/bbl. Heating oil for November declined 3.31¢ to $1.78/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month fell 5.24¢ to $1.72/gal.

The November natural gas contract, however, increased 2.4¢ to $4.90/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 30.5¢ to $3.66/MMbtu.

In London, the November IPE contract for North Sea Brent crude dropped $1.36 to $67.20/bbl. Gas oil for October fell $7 to $561.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes retreated 39¢ to $67.75/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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