MARKET WATCH: Energy prices continue to fall in lax market

Energy prices continued to fall Jan. 27 as traders shrugged off a relatively bullish government report on US oil inventories.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 28 -- Energy prices continued to fall Jan. 27 as traders shrugged off a relatively bullish government report on US oil inventories.

“Yesterday, the [US] Department of Energy reported its first overall draw for 2010 as total petroleum inventories fell by 2.5 million bbl compared [with] a consensus build of 700,000 bbl,” said analysts in the Houston office of Raymond James & Associates Inc. “This bullish news, however, wasn't enough to pull oil prices out of their January tailspin (down 10% for the month), falling by more than a percent after yesterday's close. Energy stocks underperformed the broader markets.”

They said, “Natural gas prices fell by 4% closing out the February contract below $5.50[/MMbtu]. Last night crude oil caught a momentary boost after [US President Barack Obama's] State of the Union address as job creation and economic recovery were stressed during the speech.” They said crude was up in early trading Jan. 28 while gas continued its decline.

“With trading closing at its lowest prices of the month and the coldest weather for the season most likely behind us, we expect the signs for a winter rally might also be behind us,” Raymond James analysts said.

US inventories
On Jan. 28, DOE’s Energy Information Administration reported the withdrawal of 86 bcf of natural gas from US underground storage in the week ended Jan. 22—well below the Wall Street consensus of a draw of 104-105 bcf. That reduced the working gas in storage to 2.5 tcf, up 120 bcf from year-ago levels and 87 bcf above the 5-year average.

Earlier, EIA said commercial US inventories of crude fell 3.9 million bbl to 326.7 million bbl in the week ended Jan. 22. Gasoline stocks rose 2 million bbl to 229.4 million bbl. Distillate fuel inventories increased 400,000 bbl to 157.5 million bbl (OGJ Online, Jan. 27, 2010).

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The weekly DOE statistics are still not coming to the rescue of the large speculators, and the record net length that they have accumulated in crude, heating oil, and gasoline is going to be harder and harder to manage.”

Citing the weekly government report on crude and petroleum products, Jakob said, “There was an overall stock reduction of 5.7 million bbl last week but 4.3 million bbl of that was in propane while the main stocks (crude, jet [fuel], distillates, gasoline) had a reduction of 1.6 million bbl and have built by about 9.5 million bbl so far this month. Crude stocks in the US Gulf [Coast] were only marginally reduced (down 1 million bbl). Given that there were some weather delays last week and discharging delays this week linked to the oil spill, the market will be discounting any reported draws next week as well and will ready itself for large reported builds for the start of February.” The Sabine Neches Waterway was shut down temporarily as workers attempted to clean up 450,000 gal of crude spilled into the waterway at Port Arthur, Tex., on Jan. 23 when the 95,660-dwt Eagle Otome tanker collided with a barge after apparently losing power (OGJ Online, Jan. 27, 2010).

Stocks in Cushing, Okla., were reduced by 700,000 bbl, according to EIA figures. However, Jakob reiterated, “We will not be buying into the relative leaner stocks in the West Texas Intermediate hub. This because there is close to 1 million b/d of additional pipeline capacity from Canada to the Midwest [that] is starting in the second quarter, and imports from Canada have rebounded strongly this week (at 1.458 million b/d, up 322,000 b/d vs. the average of the 2 previous weeks). The increase in pipeline capacity from Canada should also contribute to increased production from North Dakota while Shell is expected to start in the coming days production from its 100,000 b/d Perdido field in the US gulf.”

Refinery run levels should continue at low levels due to additional operational glitches and some lower processing rate linked to the supply issues around the oil spill in the Sabine Neches Waterway, Jakob observed. “Onshore crude oil stocks in the US are about 12 million bbl below the levels for the same week last year, but that is discounting some of the oil sitting on tankers due to the weather and oil spill delays. Furthermore, because of the low refinery run environment, the days-of-forward cover in crude oil are about at par to last year and at the highest level since 1994,” he said.

Jakob added, “The weather has been globally cold in December and most of January, but despite that the stocks of heating oil were building during the week in the East Coast. The days of cover in distillates are at the highest level since 1993.”

He said, “Basically the supply and demand situation in the US has not been that comfortable since 1994, and while we are not calling for prices to be sustained at the 1994 levels (about $45/bbl for WTI) we still do not see the ingredients that would justify a rapid return to the price levels of 2008.”

In other news, the Federal Reserve said it will keep the short-term interest rate at a record-low level of nearly zero for “an extended period.”

Meanwhile, the US Department of Labor said first-time claims for unemployment benefits dropped 8,000 last week to a seasonally adjusted 470,000. However, the 4-week average rose for the second consecutive week, up to 456,250. It previously had fallen for 19 weeks. More than 5.6 million people were receiving unemployment benefits as of early January.

The US Department of Commerce reported orders for manufactured goods inched up 0.3% in December, far less than many expected. In 2009, durable goods orders fell 20.2%, the largest drop dating to 1992. However, orders for capital goods were up 1.3%.

Energy prices
The March contract for benchmark US light, sweet crudes fell $1.04 to $73.67/bbl Jan. 27 on the New York Mercantile Exchange. The April contract dropped $1 to $74.15/bbl. On the US spot market, WTI at Cushing was down $1.04 to $73.67/bbl. Heating oil for February delivery lost 3.4¢ to $1.92/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.82¢ to $1.94/gal.

The expiring February natural gas contract dropped 21.1¢ to $5.27/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 16¢ to $5.43/MMbtu.

In London, the March IPE contract for North Sea Brent crude lost $1.05 to $72.24/bbl. Gas oil for February continued to climb, however, up $1 to $597.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes slipped by 7¢ to $71.87/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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