MARKET WATCH: Optimistic outlook lifts energy prices

Better-than-expected earnings reports across the equity market and other positive indicators of economic recovery raised crude prices July 21 for the sixth consecutive session of the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 22 -- Better-than-expected earnings reports across the equity market and other positive indicators of economic recovery raised crude prices July 21 for the sixth consecutive session of the New York market.

Testifying before Congress, Federal Reserve Chairman Ben Bernanke said he sees “tentative signs of stabilization” of the US economy. His optimism helped strengthen the dollar.

Crude prices were down in early trading July 22 following a bearish report the previous evening by the American Petroleum Institute of a 3.1 million bbl build in US crude inventory. Analysts in the Houston office of Raymond James & Associates Inc. also reported apparent profit-taking in the equity market.

“The API data was a bit of a chiller with a strong rebound in crude oil stocks,” said Olivier Jakob at Petromatrix, Zug, Switzerland. However, he said, “The only flag that we need to post on the API data is that once again (we had the same occurrence 2 weeks ago) the reported crude oil imports are too low compared to the level of crude oil stock builds.”

US inventories
The Energy Information Administration said July 22 that commercial inventories of benchmark US crudes dropped 1.8 million bbl to 342.7 million bbl during the week ended July 17. That was short of a Wall Street consensus for decline of 2.1 million bbl. Despite the decrease, US crude inventories are still above average for this time of year. Gasoline stocks increased by 800,000 bbl to 215.4 million bbl in the same period, compared with a consensus for a 700,000 bbl increase. Distillate fuel inventories grew by 1.2 million bbl to 160.5 million bbl. Wall Street analysts expected an increase of 1.5 million bbl.

Imports of crude into the US were down by 346,000 b/d to 9.2 million b/d during that week. Input of crude into US refineries was down 326,000 b/d to 14.8 million b/d, with units operating at 85.8% of capacity. Gasoline production rose to 9.2 million b/d, and distillate fuel production increased to 4.1 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported the “negative trend” of narrow crude differentials is spilling over into the third quarter, “coupled with slack gasoline demand and high distillate inventories.” That, he said, “makes it unlikely that there will be much improvement to refining sector fundamentals over the remainder of the year.” He added, “Accordingly, we are lowering our second-half earnings estimates for all of the refiners in our coverage universe, and some price targets. Although we believe much of this earnings weakness is already priced into the stocks, we do not foresee a significant sector catalyst in 2009 absent a hurricane-related supply disruption.”

In New Orleans, analysts at Pritchard Capital Partners LLC reported two outlooks on future natural gas prices among North American producers. “One outlook calls for a rebound in natural gas in the latter half of 2009 as the production declines feed through to supply. They support the call for a rebound in natural gas with the lower level of drilling activity.” The analysts reported 8,000 oil and gas wells were drilled in North America during the second quarter, 27% fewer than in the first quarter and down 46% from the second quarter of 2008. It was “the lowest level of activity since 2003,” they said.

Pritchard Capital Partners said, “The other outlook for natural gas contends that due to better drilling techniques and the development of shale plays it is difficult to determine whether the lower drilling activity will deliver the necessary reduction in natural gas supply needed for a price response—essentially there is not enough data on shale play decline curves and new horizontal drilling techniques.”

Energy prices
The expiring August contract for benchmark US light, sweet crudes gained 74¢ to $64.72/bbl July 21 on the New York Mercantile Exchange. The September contract increased 32¢ to $65.61/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 74¢ to $64.72/bbl. Heating oil inched up 0.9¢ to $1.70/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month rose 2.26¢ to $1.81/gal.

The August natural gas contract increased 1.6¢ to $3.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 6¢ to $3.50/MMbtu.

In London, the September IPE contract for North Sea Brent crude gained 43¢ to $66.87/bbl. Gas oil for August was up $13.75 to $552.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 40¢ to $65.04/bbl on July 21.

Contact Sam Fletcher at samf@ogjonline.com.

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