MARKET WATCH: Oil prices rally but gas prices continue decline

Sam Fletcher
Senior Writer
HOUSTON, Mar. 18 -- Oil prices continued to rally Mar. 17 in the New York market with crude climbing almost 2% after the US Energy Department’s Energy Information Administration reported larger-than-expected draws on gasoline and distillate inventories, offsetting a small increase in crude stocks.

“A weakening dollar and [a separate] EIA oil product demand report (indicating a 3.5% increase in demand for the world's top energy consumers) helped push crude to finish the day at its highest closing price since January. Energy stocks joined in the rally, slightly outperforming the broader market,” said analysts in the Houston office of Raymond James & Associates Inc.

Natural gas prices dropped more than 1%, however, nearing the end of the winter withdrawal season. “While colder weather depleted the year-over-year storage surplus earlier this year, the market has been on a loosening trend lately. With forecasts for warmer weather, we could start to see injections into natural gas storage as soon as next week,” Raymond James reported.

The EIA reported Mar. 18 the withdrawal of 11 bcf of gas from US underground storage in the week ended Mar. 12. That left 1.6 tcf of working gas in storage, down 40 bcf for the comparable period last year and 73 bcf above the 5-year average.

It previously reported commercial US crude inventories increased 1 million bbl to 344 million bbl that same week. Gasoline stocks dropped 1.7 million bbl to 227.3 million bbl. Distillate fuel inventories were down 1.5 million bbl to 148.1 million bbl (OGJ Online, Mar. 17, 2010).

The American Petroleum Institute earlier reported US crude inventories grew by 403,000 bbl to 344 million bbl while gasoline stocks fell 3.7 million bbl to 226.1 million bbl. It said distillate inventories were down 756,000 bbl to 151.1 million bbl.

“The DOE did not show a stock draw in gasoline as sharp as the API, but the absolute stock levels are not showing a great divergence between the two reports. On crude oil, the API and the DOE are now at par, and it is still only in distillates that the two reports do not agree and where the API is much higher than DOE,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

No OPEC action
As expected, ministers of the Organization of Petroleum Exporting Countries meeting Mar. 17 in Vienna made no changes in the official 24.84 million bbl production quota set in December 2008 for the 11 members excluding Iraq (OGJ Online, Mar. 17, 2010). What’s more, there was virtually no discussion of the current over-production of some 2 million b/d among several members. Jakob sees this as “confirmation” that at the current price level “OPEC will accept that most members go to ‘zero compliance’ and will leave it to Saudi Arabia to do the required balancing act.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “Compliance is a highly sensitive issue within OPEC and at this meeting, the need to address falling compliance appears to have taken a back-seat to the need to project an overall message of unity within the organization. The fact that this meeting was so short indicates broad satisfaction within the organization with the current level of oil prices.”

They said, “If prices were to stay within the $70-80/bbl band in which prices have stabilized since last summer, all OPEC members will be in a position to meet their budgets by the yearend.” On Mar. 17, the average price for OPEC’s basket of 12 benchmark crudes was up $1.63 to $78.25/bbl.

Like others, OPEC members expect world oil demand to increase this year. “In developed countries however, there is no end in sight for refinery shutdowns and low runs,” said KBC analysts. “Developing countries are making up for the lost demand, with India and China as the main drivers of growth: in recent months, China has repeatedly broken records in terms of both refinery runs and crude imports. Two members of OPEC,
Saudi Arabia and Angola, make up about 35% of China’s total monthly crude supply.”

On the other hand, they noted Russia’s new East Siberia Pacific Ocean (ESPO) pipeline has become a direct competitor for many Middle Eastern producers, particularly Saudi Arabia. “Despite declarations to the contrary by member countries, [OPEC] is annoyed and worried by ESPO and Russia’s increasing foray into the Asian market. The introduction of ESPO has put pressure on differentials for similar grades produced in the Middle East.”

OPEC also is concerned by Iraq’s recent bidding round. “While it is a welcome situation that Iraq has returned as a stable oil producer,” KBC analysts said, “the risk of a high-producing Iraq has increased. It potentially revives the traditional tension with Iran, which has failed to be as successful as Iraq in attracting investors. If Iraq were to successfully reach its production targets while Iran’s production continues to slip in the absence of foreign investments, tensions could arise within the organization. Iraq, which is pumping around 2.5 million b/d currently, indicated on the sidelines of the meeting that it believed it would not be assigned a quota until its production reached 4 million b/d. This appears to be a case of drawing a line in the sand, rather than a position that would be accepted by other OPEC members. In the past, both [Iran and Iraq] have had similar production quotas.”

Energy prices
The April contract for benchmark US light, sweet crudes climbed $1.23 to $82.93 bbl Mar. 17 on the New York Mercantile Exchange. The May contract advanced $1.24 to $83.21/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.23 to $82.93, in step with the front-month futures contract. Heating oil for April delivery increased 2.52¢ to $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 3.47¢ to $2.31/gal.

The April natural gas contract continued falling, down 4.4¢ to $4.30/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 12¢ to $4.24/MMbtu.

In London, the new front-month May IPE contract for North Sea Brent increased $1.43 to $81.96/bbl. Gas oil for April gained $3.50 to $675.75/tonne.
Contact Sam Fletcher at samf@ogjonline.com