MARKET WATCH: Crude price tests $80/bbl on economic improvement signs

The price of crude jumped to a new 7-week high Sept. 30 for the second consecutive day, up 2.7% in the New York market after the US Department of Commerce reported a slight increase in second-quarter growth of the nation’s gross domestic product.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 1 -- The price of crude jumped to a new 7-week high Sept. 30 for the second consecutive day, up 2.7% in the New York market after the US Department of Commerce reported a slight increase in second-quarter growth of the nation’s gross domestic product.

Crude prices topped $80/bbl in intraday trading before closing just under that level. Prices continued to rise in early trading Oct. 1 in what some said may become the biggest weekly increase since April.

The government reported a decline in initial unemployment claims that exceeded expectations, adding to the bullish market. Also, China’s purchasing managers’ index for September increased at its quickest pace in 4 months. Adding to the upward pressure on crude prices, Ecuador—the smallest member of the Organization of Petroleum Exporting Countries—declared a state of emergency in a reported coup with President Rafael Correa held by police in a wage dispute until freed in a military raid. Observers fear civil unrest could curb production.

Traders already were encouraged by the Energy Information Administration’s earlier report of declines in US inventories with crude down 500,000 bbl to 357.9 million bbl in the week ended Sept. 24, gasoline down 3.5 million bbl to 222.6 million bbl, and distillate fuel down 1.3 million to 173.6 million bbl (OGJ Online, Sept. 29, 2010).

“Prices rose 5% in last 2 days on unexpected large declines in the product inventories and the positive economic news. However, we expect inventory overhang to come back and weigh on prices as there still is a long way to go before demand trims down the swelled-up crude stockpiles, which are currently 13% higher than the 5-year average,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Leon Westgate observed, “West Texas Intermediate closed above its 200-day [moving average] for the first time since mid-August, though crude oil still remains well within recent ranges. We expect that range-bound nature to continue, particularly given the large stock overhang, though, for the moment at least, the weaker dollar and positive run of economic data from the US appear to have sent the bears into hibernation.”

Olivier Jakob at Petromatrix, Zug, Switzerland, noted returns on crude oil indices have not provided a positive return this year “despite some major financial institutions telling their customers that a return to backwardation was imminent in the third quarter.” He warned, “We are still in a situation that would require a return to $90/bbl WTI by the end of December for passive investors to be just break even on their 2010 investments in WTI oil indices.”

Jakob said, “We are ending the third quarter with WTI at about the same price level ($79.97/bbl) as at the start of 2010 ($79.36/bbl), but returns on WTI indices are still down due to the contango losses. We need therefore to repeat what we said at the start of the year: The price of WTI is too high to make a profit on a passive investment in WTI indices in a contango structure. At the start of 2010 we did not expect that passive investors in WTI indices would be printing positive returns in 2010 and at current levels we do not expect that they will make a positive return in 2011 neither.”

The high price necessary to offset the WTI contango losses “would push oil into destruction economics (lower demand, higher supply) that will then generate a supply and demand rebalancing (as we remain in an environment of spare capacity both upstream and downstream) that then starts to work against the flat price gains,” Jakob said.

Meanwhile, natural gas fell 2.3% after EIA reported 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 (OJG Online, Sept. 30, 2010). “Prices will likely remain constrained until cold weather comes to town as gas-in-storage is now 6% above the 5-year average,” said analysts in the Houston office of Raymond James & Associates Inc. Gas prices were lower in early trading Oct. 1.

Sharma said, “Although the oversupply situation has continued to weigh on [gas] prices, we expect production to stabilize in October after posting brief spurts in August and September when some of the production affected by the maintenance issues came back online.”

Energy prices
The November contract for benchmark US light, sweet crudes traded as high as $80.18/bbl Sept. 30 on the New York Mercantile Exchange before closing at $79.97/bbl, up $2.11 for the day. The December contract escalated by $1.86 to $80.95/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.11 to $79.97/bbl, still in step with the front-month futures price. Heating oil for October delivery rose 5.35¢ to $2.24/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 4.93¢ to $2.04/gal.

The November natural gas contract dropped 9¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2.5¢ to $3.83/MMbtu.

In London, the November IPE contract for North Sea Brent crude gained $1.54 to $82.31/bbl. Gas oil for October jumped $19 to $706.75/tonne.

The average price for OPEC’s basket of 12 reference crudes increased $1.74 to $77.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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