MARKET WATCH: Cold temperatures boost crude prices

Cold winds in several countries around the globe continued to lift oil prices Jan. 5, with crude climbing for the ninth consecutive session in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 6 -- Cold winds in several countries around the globe continued to lift oil prices Jan. 5, with crude climbing for the ninth consecutive session in the New York market.

“As record-setting cold weather continues in the world's two leading energy consumers, the US and China, and heating demand jumps (now up 11% over normal in the US Northeast), crude prices recorded another slight rise,” said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas finished down 4.2% yesterday despite the weather as traders booked profits from Monday's 6% upward move and anticipated an inevitable return to more modest temperatures.” Crude was up and gas was down in moderate early trading Jan. 6, they said.

Raymond James analysts noted a report in The Times that freezing temperatures in Britain pushed up gas demand 28% from seasonal norms, “putting the grid on the brink of a supply shortage and dropping storage reserves to just 2 days' supply.” They said, “While (like in the US) gas prices have risen sharply, gas-to-coal switching, rising imports from Europe, and the recession all seem to be keeping a lid on just how high they can go. Keep an eye on storage levels across the pond, as it could have an impact on the flow of LNG imports to US shores later this summer (i.e. lower storage there could mean less LNG shipments here).”

US inventories
The Energy Information Administration under the Department of Energy said Dec. 6 commercial US crude inventories increased 1.3 million bbl to 327.3 million bbl in the week ended Jan. 1—above average for the time of year. That was contrary to the Wall Street consensus for a 1 million bbl draw and the earlier American Petroleum Institute report of a 2.3 million bbl drop to 328.9 million bbl of crude.

EIA reported US gasoline stocks were up 3.7 million bbl to 219.7 million bbl in the same week, far exceeding Wall Street’s expectations of an 800,000 bbl gain. Distillate fuel inventories decreased 300,000 bbl to 159 million bbl, far less than analysts’ expectations of a 1.9 million bbl draw.

Imports of crude into the US increased 328,000 b/d to 8.4 million b/d last week. For the 4 weeks through Jan. 1, US crude imports were down 1.5 million b/d to an average 8 million b/d from the comparable period in 2009. The input of crude into US refineries inched up 87,000 b/d to 13.8 million b/d in the week ended Jan. 1, with units operating at 79.9% of capacity. Gasoline production increased to 9.1 million b/d, and distillate fuel production increased to 3.8 million b/d.

API earlier reported gasoline stocks jumped 5.6 million bbl to 220 million bbl, and distillate fuels rose 962,000 bbl to 162.6 million bbl with refinery runs up slightly to 79.5% of capacity. The build in distillates reported by API “is surprising giving the cold weather and what is now a lack of contango,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Even before the release of the government report, Jakob said, “The growing API-DOE divergence will be a bear flag [for Jan. 6 trading]. Our expectations are to see in January some of the stocks that have disappeared in the tax accounting reappear on the balance sheet.”

Jakob cautioned, “Today’s DOE report covers an holiday week, and that can always lead to some statistical ‘noise’ but with the API now showing greater stocks than the DOE across the board, the DOE risk for today will be to see a 10 million bbl stock build in the main products; hence on a fundamental basis, we will approach the report with limited exposure to the long side.”

Jakob said, “In crude, the API showed a 2.3 million bbl draw but has revised [its previous weekly report up] by 700,000 bbl, and most of the reported draw is in the discounted West Coast (down 2.6 million bbl) while both the Midwest and the US Gulf were slightly increasing stocks (including a 200,000 bbl build in Cushing, Okla.). The growing bearish flag in crude oil remains in the huge divergence between the API and the DOE on the level of crude oil stocks in the US Gulf where the API is now 7.6 million bbl over the DOE levels [prior to the latest EIA report]. This divergence is now confirmed for the second consecutive week, and the difference between the two reports is plainly huge. We do not know if it is the API or the DOE that is completely wrong on the reading of US Gulf crude oil stocks but one of them is, and on a risk basis we have to consider now the potential for the DOE to show a significant revision to its number.”

Energy prices
The February contract for benchmark US light, sweet crudes increased 26¢ to $81.77/bbl Jan. 5 on the New York Mercantile Exchange. The March contract advanced 29¢ to $82.41/bbl. On the US spot market, West Texas Intermediate at Cushing was up 26¢ to $81.77/bbl. Heating oil for February delivery inched up 0.36¢ but finished virtually unchanged at an average $2.19/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 2.06¢ to $2.13/gal.

The February natural gas contract dropped 24.7¢ to $5.64/MMbtu on NYMEX. On the US spot market where supply meets the burner tip more immediately, however, gas at Henry Hub, La., continued climbing, up 9.5¢ to $6.15/MMbtu.

In London, the February IPE contract for North Sea Brent crude increased 47¢ to $80.59/bbl. Gas oil for January gained $5.50 to $659.25/tonne.

The Vienna office of the Organization of Petroleum Exporting Countries was closed Jan. 6, with no official price update available.

Contact Sam Fletcher at samf@ogjonline.com.

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