MARKET WATCH: Gasoline demand pushes crude above $70/bbl

Crude prices shot above $70/bbl Sept. 30 in the New York market after a Department of Energy agency report implied a jump in US gasoline demand.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 1 -- Crude prices shot above $70/bbl Sept. 30 in the New York market after a Department of Energy agency report implied a jump in US gasoline demand. The price of natural gas futures declined, however, in anticipation that US gas storage will reach maximum capacity before the winter heating season.

DOE’s Energy Information Administration reported Oct. 1 the injection of 64 bcf of gas into US underground storage in the week ended Sept. 25. That put the amount of working gas in storage at 3.589 tcf, up 491 bcf from a year ago and 481 bcf above the 5-year average.

On Sept. 30, EIA reported commercial US crude inventories increased by 2.8 million bbl to 338.4 million bbl in that same week. Gasoline inventories decreased by 1.6 million bbl to 211.5 million bbl, while distillate fuel inventories increased by 300,000 bbl to 171.1 million bbl.

“Oil prices rose the most in nearly 6 months as the DOE reported a smaller-than-expected build in total petroleum inventories. While oil fell through its 100-day moving average…and appeared ready to retest the $60/bbl level, the reported draw in gasoline inventories helped push crude up 5.5%,” said analysts in the Houston office of Raymond James & Associates Inc.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The draw in gasoline and lower build in distillate probably outweighed the larger-than-expected crude build. Excessive and consistently large gasoline and distillate builds have been a problem for crude. The jump in implied gasoline demand from 8.933 million bbl to 9.269 million bbl also provided a positive sign that was counter to a weak Chicago Purchasing Managers Index.” It “was of the few time this year the refined products part of the report has been positive,” they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, observed: “The problem with violent price movements on the last day of a quarter is that you can never be sure how much of it is due to mark-to-market interests and how much is genuine risk taking.” Nonetheless, he said, “We will have to accept that part of yesterday’s move was risk positioning in front of the Geneva talks.” Negotiators from the US, the UK, France, Russia, China, and Germany were to meet in Geneva Oct. 1 to confront Iran over its nuclear program.

“Geneva will be an important center of gravity for oil prices today, but we are not convinced that after yesterday’s move an additional premium needs to be priced for Iran given the sound-bites that the US will go relatively soft in this meeting and given that little clear explanations have been provided for the surprising and extremely unusual travel yesterday of the Iranian foreign minister to Washington, DC (officially this was only to visit the Pakistani embassy, even though it seems that the Pakistani embassy was not informed beforehand of the visit),” Jakob said.

“While we buy the explanation of a geopolitical premium, we are not buying that the DOE provided enough of a change of market fundamentals to justify such a strong reversal in price,” Jakob said. “Yes, there was a draw in gasoline stocks, but the DOE calculated days-of-cover in gasoline actually increased (it is calculated on the 4-week average of demand, not on the 1-week number) while days of cover in distillates are reaching a new record high. There is still no apparent solver to the distillates overhang other than refinery run cuts, and we would like to see a reversal in the heating oil to gasoline spread before being convinced that it is yesterday’s draw in gasoline that scared the market.” Refinery runs declined last week but mostly along the US Gulf Coast, resulting in a further build in crude stocks within that area, he said.

Jakob added, “Total US demand for petroleum products is 1 million b/d higher than a year ago but making any year-on-year conclusion is an impossible task given that last year’s numbers were distorted by hurricanes. The 4-week average US demand for oil is 1.4 million b/d lower than in September 2008 or September 2007.”

As for natural gas, Raymond James analysts said, “For the second day in a row, natural gas rallied from an early morning sell-off into positive territory but eventually settled the New York Mercantile Exchange session down 0.7%.” They said, “With Henry Hub cash prices over $1.50/Mcf lower than the November contract, and full storage around the corner, we anticipate some weakness in November gas prices over the next few weeks.”

Pritchard Capital Partners noted, “The Obama administration announced that it withheld 79 permits for mountaintop coal mining in four Appalachian states. Due to coal’s abundance, coal supply is not an issue, but any reduction in coal supply is an opportunity for natural gas to pick up market share.”

Energy prices
The November contract for benchmark US sweet, light crudes traded at $66.22-70.72/bbl Sept. 30 on NYMEX before closing at $70.61/bbl, up $3.90 for the day. The December contract gained $3.86 to $70.94/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.90 to $70.61/bbl. Heating oil for October delivery increased 9.54¢ to $1.80/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month advanced 9.78¢ to $1.73/gal.

The November natural gas contract lost 3.4¢ to $4.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 2¢ to $3.38/MMbtu.

In London, the November IPE contract for North Sea Brent crude was up $3.58 to $69.07/bbl. Gas oil for October increased $14.75 to $552/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.30 to $65.55/bbl on Sept. 30.

Contact Sam Fletcher at samf@ogjonline.com.

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