MARKET WATCH: Energy prices dip; oil registers large quarterly advance

Energy prices retreated June 30, giving back much of the gain from the previous session with crude again dropping below $70/bbl “on a stronger dollar and in response to a lower than expected consumer confidence number indicating that demand for gasoline may not pick up in the coming months,” said analysts at Pritchard Capital Partners LLC, New Orleans.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 1 -- Energy prices retreated June 30, giving back much of the gain from the previous session with crude again dropping below $70/bbl “on a stronger dollar and in response to a lower than expected consumer confidence number indicating that demand for gasoline may not pick up in the coming months,” said analysts at Pritchard Capital Partners LLC, New Orleans.

Nevertheless, crude prices escalated 41% through the second quarter that ended June 30 in the biggest 3-month rally since the third quarter of 1990 when Iraq invaded Kuwait. Crude has increased 57% over the first half of 2009, including a 5.4% increase in June, the fifth consecutive monthly gain.

On the other hand, the Conference Board said US consumer confidence fell to 49.3 in June down from an expected 55.5 and below 54.8 in May. In other news, the Case-Shiller home price index released June 30 showed US home prices in 20 selected cities fell 0.6% fell in April, with declines in 11 cities, compared with a 2.2% decline in March. Officials acknowledged the overall pace of decline has slowed.

More importantly, the US dollar strengthened June 30 against most rival currencies, reversing a small decline in earlier trading.

Crude was climbing in early trading July 1, but natural gas continued to decline due to forecasts for milder weather and data showing US gas production down 200 MMcfd to 63.3 bcfd in April, analysts reported. Such a small decline “should not be a huge surprise as our industry checks indicate that a larger decline will occur in May, 600 MMcfd, and the production decline will increase into the yearend as the combination of the rig count decline and shut-ins cut into production; by the end of 2009 production should decline 4-6 bcfd,” said Pritchard Capital Partners.

US inventories
The Energy Information Administration said July 1 commercial US crude inventories fell 3.7 million bbl to 350.2 million bbl in the week ended June 26. That exceeded Wall Street expectations of a 2 million bbl draw but was less than the whopping 5.9 million bbl decline projected by the American Petroleum Institute. Still, US crude stocks remain above average for this time of year. Just a week ahead of the peak demand period over the July 4 Independence Day holiday in the US, total gasoline inventories jumped by 2.3 million bbl to 211.2 million bbl with increases in both finished gasoline inventories and gasoline blending components. That was a little above the 2 million bbl build expected by Wall Street analysts. Distillate fuel inventories increased by 2.9 million bbl to 155 million bbl, also above average for this time period. Wall Street expected a 1.5 million bbl increase.

Imports of crude into the US inched up 79,000 b/d to 9.4 million b/d. In the 4 weeks through June 26 US oil imports averaged 9.2 million b/d, 790,000 b/d below the same 4-week period last year. Gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 979,000b/d. Distillate fuel imports averaged 165,000 b/d.

The input of crude into US refineries during the latest week dipped by 39,000 b/d to 15 million b/d with units operating at 87% of capacity. Gasoline production increased to 9.2 million b/d while distillate fuel production was up to 4.2 million b/d.

“The low crude oil import number reported in the weekly reports and the associated crude stock draws that go with it is evidence that there is a supply story that has been too greatly discounted by the demand story,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “US crude oil imports from the Organization of Petroleum Exporting Countries were 1.3 million b/d lower than a year ago in April and since the US refineries runs are only about 600,000 b/d lower than a year ago, the difference has to be met by higher imports from other non-OPEC sources or by drawing crude oil stocks (offshore and onshore). OPEC supplies are currently too low for the level of US refinery runs, and this even before the recent Nigerian supply disruptions have been accounted for. With a narrowing contango, refiners can now run down more of their crude inventories; or given that demand for products is not yet particularly strong, to run less, but then the stock draws will convert from draws in crude to draws in products. One way or another, on a global hydrocarbon basis the OPEC supply cuts are starting to be more visible and the risk is increasing that we have past the peaks in global stocks.”

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, noted refined product inventories (gasoline plus distillate plus jet fuel) increased 5.4 million bbl (1.3%) last week due primarily to “very weak demand.” He said, “Gasoline consumption was 3% below year-ago levels, while distillate demand of 3.26 million b/d was the lowest weekly total since July 2003. Gasoline demand is likely to improve next week due to July 4th holiday driving, however, weak demand remains a major concern for refiners.”

EIA regional data showed mixed results for the East Coast, “which is benefiting from lower gasoline imports (second quarter 2009 is 15% lower than second quarter 2008) but is being hurt by rising distillate inventories, which are now almost 50% above the 5-year average for this calendar week,” Rousseau said. “Gasoline inventories on the West Coast jumped 3% last week due to higher production and increased imports.”

Data in the International Energy Agency’s recent Medium-Term Oil Market Report “was bearish for refiners, in our view, since the IEA expects refinery capacity additions to exceed demand growth significantly over the next 6 years, keeping downward pressure on refining margins,” said Rousseau. “As with past cycles, excess refining capacity is likely to be removed from the system over time via refinery closures (due to weak cash flows and increasingly stringent environmental regulations) and improved demand (the IEA expects global gross domestic product to average 4.6% from 2011-2014), in our view. Although we do not foresee a substantial improvement in refining sector fundamentals in the near term, we believe the weak sector conditions are already priced into the stocks, in most cases,” he said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said in the bank’s June 30 World Outlook publication, “The financial crisis has introduced some compelling reasons for the increasing appeal of commodities over the medium term. First, aggressive fiscal action has included a significant increase in infrastructure spending, which has boosted commodity demand. Second the tightening in credit conditions over the past 2 years has also led to a significant reduction in capital expenditure for mining and oil exploration companies. We estimate that in the absence of new investment and given depletion rates for existing oil wells the global oil production base will fall from 86 million b/d to 75 million b/d by 2015. We believe this has only enhanced the upside price risks for crude oil heading into the next decade. Finally the expansion of the [US Federal Reserve’s] balance sheet and the surge in government borrowing has raised concerns about higher inflation ahead. We believe this has enhanced the appeal of commodities as a distinct asset class given their inflation protection properties.”

Global GDP growth for 2009 was revised by the bank to –1.5% from an earlier range of –1.7 to –1.9%. “The upward revision is due entirely to better prospects for industrial countries,” said Sieminski. “Most of the upward revision results from a stronger outlook for investment and export growth, reflecting greater confidence in the effectiveness of authorities' efforts to restore stability in the financial sector.”

Coincidentally, the bank’s commodities team has marked-to-market DB's oil price deck to reflect current prices “well above our previous forecast,” said Sieminski. He noted oil averaged “just under $60/bbl” in the second quarter, ending the quarter close to recent highs of $72/bbl. “This pushes an upgrade to third and fourth quarters to $75/bbl” from prior forecasts of $50/bbl. Sieminski said, “Our 2009 oil forecast now rounds up to $64/bbl, revised from $47/bbl, primarily reflecting US dollar strength and funds flows considerations, while our 2009 US natural gas forecast eases back to $4.25 from $4.50/MMbtu owing to protracted supply and demand imbalances that have also caused us to shave $1/MMbtu in 2010, bringing that forecast down to $6/MMbtu. We retain the view that 2010 oil prices will average $55/bbl, giving way to better prospects in 2011.”

Energy prices
The August contract for benchmark US light, sweet crudes traded at $68.90-73.38/bbl June 30 on the New York Mercantile Exchange before closing at $69.89/bbl, down $1.60 for the day. The September contract lost $1.54 to $70.84/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.60 to $69.89/bbl. Heating oil for July delivery dropped 6.55¢ to $1.72/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 3.86¢ to $1.90/gal.

The August natural gas contract continued to fall, down 10.9¢ to $3.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 16.5¢ to $3.71/MMbtu, wiping out its 6¢ gain from the previous session.

In London, the August IPE contract for North Sea Brent crude retreated by $1.69 to $69.30/bbl. The July gas oil contract lost $12.75 to $557/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 40¢ to $69.83/bbl on June 30.

Contact Sam Fletcher at samf@ogjonline.com.

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