MARKET WATCH: Crude rallies to $82/bbl in New York

After a single-day decline, prices for crude and petroleum products came roaring back Oct. 21 in the New York market, with the new front-month December crude contract hitting a fresh year-long high of $82/bbl in intraday trading.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 22 -- After a single-day decline, prices for crude and petroleum products came roaring back Oct. 21 in the New York market, with the new front-month December crude contract hitting a fresh year-long high of $82/bbl in intraday trading. It marked the ninth increase in crude prices over 10 trading sessions.

“Crude rose in response to a weaker dollar and a positive crude report [by the Energy Information Administration] that for the second week running showed a lower build in crude and a draw in gasoline and distillate inventories,” said analysts at Pritchard Capital Partners LLC in New Orleans. “Continued draws from the elevated gasoline and distillate inventories is a key positive for crude.”

EIA said commercial US inventories of crude increased by 1.3 million bbl to 339.1 million bbl in the week ended Oct. 16. Gasoline stocks fell 2.3 million bbl to 206.9 million bbl. Distillate fuel inventories decreased by 800,000 bbl to 169.9 million bbl. “Imports fell to their lowest level of the year. After showing signs of improvement the last 3 weeks, gasoline demand dropped to under 9 million b/d, according to the EIA. Inventories of distillate remain very high heading into winter,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research (OGJ Online, Oct. 21, 2009).

Moreover, Pritchard Capital Partners said, “The dollar continued to weaken following pessimistic comments from the Federal Reserve’s Beige Book [published eight times a year in which each Federal Reserve Bank reports current economic conditions in its district]. Wal-Mart Stores Inc. also said that customer’s ‘wallets are challenged.’ If the Beige Book and Wal-Mart comments are a guide, it would seem unlikely that the Fed will raise rates anytime soon. If the Fed remains on hold, then US dollar weakness should persist and provide support for crude and commodities, which should lead to outperformance from the energy sector.”

The US Department of Labor reported Oct. 22 that new initial claims for unemployment benefits rose more than expected to a seasonally adjusted 531,000 last week, up from an upwardly revised 520,000 the previous week. However, the total number of people continuing to claim jobless benefits dropped for the fifth consecutive week, down to 5.9 million from just over 6 million previously.

Natural gas
The front-month natural gas contract retreated on the New York market Oct. 21 ahead of the weekly update of gas storage, ending its recent rally. EIA reported a smaller-than-expected injection of 18 bcf of natural gas into US underground storage during the week ended Oct. 16. That put working gas in storage at 3.734 tcf with a 3.9 tcf maximum capacity. That’s 397 bcf more gas in storage than in the same period last year and 114 bcf above the 5-year average.

“Last week was one of the coldest mid-October months on register,” explained analysts in the Houston office of Raymond James & Associates Inc. They added, “The market is indicating that congestion issues may not be as extreme as previously thought, with cash prices near $5/Mcf and a rapidly deflating contango in the futures market. While this may be bullish for prices in the short-term, we believe the market did not send producers the right signals to correct for the supply imbalance, which paints a bearish picture for 2010.”

The recent rally of gas prices, analysts at Energy Solutions Inc., Verona, Wis., said, “isn’t built on reality, it is built on the perception that the demand-supply balance will substantially tighten this winter.” They added, “While production may be down somewhat, we believe that the current price contango (i.e. prices for January are $1/MMbtu higher than prices for November) will prevent tightening of the supply-demand balance. Regardless of how winter ends up, November conditions are going to be more moderate than January conditions. If winter starts out colder than normal in November, storage owners are going to retain storage for use later in the winter when they believe they’ll really need it—plus there should be ample supplies in the physical market to purchase in November to meet demand.”

Conversely, Energy Solutions analysts said, “If winter starts out warmer than normal in November, storage owners are going to retain storage because of the price contango and will opt to utilize storage when prices are higher. As a result, storage inventories should still be at very high levels at the end of December, and that is going to contain price rallies and promote price declines.”

Energy prices
The front-month December contract for benchmark US light, sweet crudes climbed $2.25 to $81.37/bbl—a new record closing for 12 months on the New York Mercantile Exchange. The January contract escalated $2.28 to $81.96/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.28—the same increase as the January contract—to match the closing price of the December contract at $81.37/bbl.

Heating oil for November delivery gained 5.8¢ to $2.11/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month continued its climb, up 6.66¢ to $2.05/gal.

The November natural gas contract dropped 6.1¢ to $5.10/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued its increase, up 22.5¢ to $4.83/MMbtu.

In London, the December IPE contract for North Sea Brent crude advanced $2.45 to $79.69/bbl. Gas oil for November gained $11.50 to $649/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 55¢ to $76.37/bbl on Oct. 21.

Contact Sam Fletcher at samf@ogjonline.com.

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