MARKET WATCH: Bullish government inventories report lift oil price

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 30 -- The front-month crude contract jumped to a 7-week high on Sept. 29, temporarily topping $78/bbl in intraday trading in the New York market, after a Department of Energy agency reported unexpected drops in US inventories of gasoline and distillate fuel.

The Energy Information Administration said commercial US crude inventories dipped by 500,000 bbl to 357.9 million bbl in the week ended Sept. 24, less than the Wall Street consensus for a 700,000 bbl draw. Gasoline inventories fell 3.5 million bbl to 222.6 million bbl, counter to analysts’ expectations for a 400,000 bbl increase. Distillate fuel stocks dropped 1.3 million to 173.6 million bbl, while the consensus was for a 300,000 bbl increase (OGJ Online, Sept. 29, 2010).

On Sept. 30, EIA reported the injection of 74 bcf of natural gas into US underground storage in the week ended Sept. 24, up from Wall Street’s consensus for 68 bcf. That increased working gas in storage above 3.4 tcf. That’s 166 bcf less than at in the same period a year ago but 202 bcf above the 5-year average.

“It's shoulder season and refiners are cutting back on utilization rates,” said analysts in the Houston office of Raymond James & Associates Inc. “Coupled with a sizeable uptick in gasoline demand, the DOE reported a large and unexpected draw in petroleum inventories. With the addition of another bullish Chinese manufacturing data point and a weakening US dollar, the stage was set for a breakout day and crude delivered by increasing 2.2%.” Energy stocks “piggybacked” on the strength in crude, they said.

The weekly DOE report showed “a total weekly stock draw of 5.1 million bbl, which looks large at face value but which needs some drill-down analysis,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The stock draw is coming from a record high base and we will need a 7 million bbl draw every week in the fourth quarter just to get to last year’s end-of-year levels; but that is nothing new.” More importantly, there was a crude oil stock draw of 2.1 million bbl in Petroleum Administration for Defense [PADD] 1 [on the East Coast], which is a relative large stock reduction for the East Coast,” Jakob said.

However, he said this stock-draw is mostly due to the decision by independent Western Refining Inc. to terminally shut down its 70,000 b/d Yorktown, Va., refinery in September due to continued poor margins. “The East Coast has been losing a considerable amount of refining capacity due to poor processing economics, and if the refineries are shut down cold then the emptying of their crude oil tanks is not a bullish item per se,” said Jakob. “There was a small stock build of crude in the US Gulf Coast, and stocks were unchanged in the Midwest (PADD 2) hence apart from the stock management linked to the shutdown of the Yorktown refinery, the US crude oil stock supply was really unchanged during the week. There are currently some weather delays at the Mexican crude oil ports and that will probably impact the supply picture of the US Gulf in the next 2 weeks but in this report, the picture on crude is very steady.”

Most of the large draw of US gasoline was in PADD 1 on the East Coast “where the Yorktown refinery is situated,” Jakob said. “Hence, we can not exclude that some of this localized big drop in gasoline inventory level is also linked to the closure of the Yorktown refinery.”

At Pritchard Capital Partners LLC in Houston, Anuj Sharma, research analyst, said, “Prices found further support as an index of manufacturing in China rose to the highest level in 5 months and the dollar index declined by 0.3% to an 8-month low yesterday.” “We expect some profit-taking to take place at this level, although, the improving European consumer and executive confidence, which rose to the highest level since January 2008, will provide additional price support,” Sharma said.

Energy prices
The November contract for benchmark US light, sweet crudes climbed as high as $78.13/bbl in intraday trading Sept. 29 on the New York Mercantile Exchange before closing at $77.86/bbl, up $1.68 for the day. The December contract also increased $1.68, to $79.09/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.68 to $77.86/bbl. Heating oil for October delivery rose 6.6¢ to $2.19/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 4.76¢ to $2/gal.

The new front-month November natural gas contract inched up 1.1¢ to $3.96/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped by 1¢ to $3.80/MMbtu.

In London, the November IPE contract for North Sea Brent crude climbed $2.06 to $80.77/bbl. Gas oil for October was up $5.75 to $687.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 87¢ to $75.74/bbl.

Contact Sam Fletcher at [email protected].