MARKET WATCH: Warmer weather, Chinese economy reduce crude price

The decline in energy prices gained momentum in the second day of a downturn with crude dropping under $81/bbl Jan. 12 in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 13 -- The decline in energy prices gained momentum in the second day of a downturn with crude dropping under $81/bbl Jan. 12 in the New York market.

Crude was “down 2% (and taking energy stocks along with it) as China raised bank reserve requirements to prevent its economy from overheating,” said analysts in the Houston office of Raymond James & Associates Inc. “It was the largest drop in 5 weeks and was supported by continued forecasts that the cold spell across the US, which has buoyed prices recently, will subside as the week progresses.”

On the heels of reports of a jump in Chinese energy imports in December, the People's Bank of China increased bank reserve ratios by a half point Jan. 12 and for the second time in a week raised interest rates for its interbank market in an apparent government attempt to cool the rapid expansion of the world's fast-growing economy.

As for natural gas, Raymond James analysts said, “The weather outlook did not have the same effect, as prices took a breather from 3 straight days of declines to finish up 2% yesterday.” Oil and gas prices were down in early trading Jan. 13.

US inventories
The Energy Information Administration said Jan. 13 commercial US crude inventories jumped 3.7 million bbl to 331 million bbl in the week ended Jan. 8, more than double the Wall Street consensus for a 1.5 million bbl build. Gasoline stocks shot up 3.8 million bbl to 223.5 million bbl, compared with expectations of a 1.7 million bbl increase. Distillate fuel inventories increased 1.4 million bbl to 160.4 million bbl, surprising analysts who anticipated a 1.3 million bbl decline. Crude, gasoline, and distillate stocks are all above average for this time of year, EIA said.

Imports of crude into the US increased 540,000 b/d to 8.9 million b/d last week. In the 4 weeks through Jan. 8, US crude imports averaged 8.2 million b/d, down 1.3 million b/d from the comparable period a year ago.

The input of crude into US refineries increased 213,000 b/d to 14 million b/d with units operating at 81.3% of capacity, EIA reported. Gasoline production fell to 8.5 million b/d, while distillate fuel production increased to 3.9 million b/d.

The unexpected increase in distillate inventories was “due primarily to a high level of heating oil imports,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “In total, production of light products fell to its lowest weekly level since Oct. 16, which we view as a sign the refiners are attempting to reduce supply in order to support margins. However, given that demand is seasonally weakest in the first quarter, we remain concerned about the near-term outlook for the refining sector.”

EIA’s regional data showed declining production on the East Coast, with refinery utilization rates falling below 60%. “Despite a surge of imports into the region, East Coast distillate inventories fell 2.4 million bbl week-over-week and are moving more in-line with historical levels,” Rousseau said. “Inventories of both gasoline and distillate increased in the Gulf Coast due to higher production (85% utilization rate).”

The American Petroleum Institute earlier reported US crude stocks up 1.2 million bbl to 330.1 million bbl last week. Gasoline inventories jumped by 6.8 million bbl to 226.9 million bbl, API said, while distillates gained 3.6 million bbl to 166.2 million bbl despite colder weather, with refining capacity up marginally to 79.8%.

Prior to the EIA report, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Yesterday a wire-eating rat forced Citgo Petroleum Corp. to shut down a fluidized catalytic cracking unit at its [156,800 b/d] Corpus Christi refinery, and while there has been a series of FCC glitches in recent days (some of them linked to freezing temperatures rather than rats) the gigantic gasoline build reported by the API should alleviate any fears of a tightening in the days of forward cover.”

Jakob said, “Large speculators are holding record net long positions in gasoline, and we are not in step with that logic when gasoline stocks are at the highest levels for the same week since 1994; when ethanol takes a growing market share from petroleum gasoline (one would actually need to add about 10 million bbl of ethanol stocks when comparing with 1994); when unemployment is at extremely high level, and consumers are switching to higher mileage automobiles. According to MasterCard [Spending Pulse], gasoline sales at the pump were up 2.1% week-on-week and up 1.8% week-on-year with the 4-week average up 1.1% vs. the low levels of 2009.

Energy prices
The February contract for benchmark US light, sweet crudes dropped $1.73 to $80.79/bbl Jan. 12 on the New York Mercantile Exchange. The March contract fell $1.84 to $81.17/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., kept pace with the front-month future contract, down $1.73 to $80.79/bbl. Heating oil for February delivery lost 4.83¢ to $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 4.49¢ to $2.10/gal.

The February natural gas contract regained 13.7¢ to $5.59/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 16.5¢ to $5.61/MMbtu.

In London, the February IPE contract for North Sea Brent crude lost $1.67 to $79.30/bbl. Gas oil for January was unchanged at $657/tonne.

Jakob reported, “Gas oil deliveries into the January contract reached a recent high. Europe remains cold but is starting to run short on salt and continued travel disruption should cap some demand for diesel and jet [fuel], offsetting some of the increased demand for heating oil.” In France, air controllers, staff at the national weather service, and some refinery workers “have decided it is a good time to go on strike,” he added.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $1.21 to $79.08/bbl on Jan. 12.

Contact Sam Fletcher at samf@ogjonline.com.

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