MARKET WATCH: Crude price climbs to 5-month high above $83/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 7 -- The front-month crude contract inched up 0.5% to a 5-month high Oct. 6 in the New York market, despite a generally neutral government report on US petroleum inventories.

The day's gains were fueled by a further weakening of the US dollar following the Federal Reserve System's indication it will begin purchasing Treasury securities to revive the nation's economy, said analysts in the Houston office of Raymond James & Associates Inc. Natural gas prices climbed 3.3% ahead of a government report on natural gas storage. “With little to trade on, the broader market finished the day roughly flat,” analyst said.

Since the market closed Sept. 28, the price of the front-month light crude has risen more than $6/bbl, noted analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC in Surrey, UK. “Almost a year since crude futures broke convincingly above $70/bbl (Oct. 12, 2009), crude futures may now have pushed, on a sustainable basis, into a higher trading range of above $80/bbl,” they said. “The surge in crude futures has been supported by a range of factors, but the dominant recent influence has been the weakness of the US dollar. This has been driven by rising expectations that the US Federal Reserve will soon embark on a second round of quantitative easing (QE2).

The chance of further monetary expansion by the Fed to boost the flagging US economic growth increased as the Bank of Japan unexpectedly cut interest rates to near zero (OGJ Online, Sept. 6, 2010). “The prospect of impending stimulus to the US economy argues in favor of a weak dollar and strong equities, both of which would remain very supportive to oil prices,” KBC analysts said.

At Standard New York Securities Inc., part of the Standard Bank Group, analysts said the price of gold soared to new highs in many major currencies on Sept. 6, “driven by sustained economic and financial concerns. That has, they said, “weakened the dollar, and gold has therefore, in dollar terms, experienced a ‘double whammy’—the dollar fall has boosted prices, and the reasons for the weakness are themselves driving gold investment.”

US inventories
The Energy Information Administration earlier reported commercial US crude inventories expanded by 3.1 million bbl to 360.9 million bbl in the week ended Oct. 1, exceeding Wall Street’s consensus for a 400,000 bbl increase. Gasoline stocks fell 2.6 million bbl to 219.9 million bbl, well below analysts’ expectations of a 300,000 bbl decline. Both finished gasoline and blending components diminished. Distillate fuel inventories dropped 1.1 million bbl to 172.5 million bbl compared with an outlook for 1 million bbl decline (OGJ Online, Oct. 6, 2010).

EIA subsequently reported the injection of 85 bcf of natural gas in underground storage during the same week, up markedly from a consensus for 78 bcf. That brought the amount of working gas in storage to 3.499 tcf, down 149 bcf from the same period a year ago but 220 bcf above the 5-year issue.

Standard Bank analysts said, “The swing in stocks between crude and products was largely caused by a 2.7% reduction in refinery utilization. Cushing(, Okla.) stocks were 749,000 bbl higher, reversing the recent downward trend in Cushing inventory,” as Enbridge Energy Partners LP reactivated its 670,000 b/d 6A crude pipeline that was shut-in Sept. 9 because of a leak.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “US petroleum stocks are at record high for the season and have to be reduced if US refineries want to be able to operate in the first quarter. The hurricane season has not provided one bbl of refinery disruption, and refiners need to reduce some of product stock overhang if they don’t want to face additional shutdowns next year.”

Crude stocks in the Midwest and Gulf Coast “have built for a second week and are very close to the highest levels of the year. No shortage of stock cushion there. The 3-day shut-down of the Houston Ship Channel should translate into a US Gulf Coast stock draw in the next report, but those will purely be discharge delays,” Jakob said.

Meanwhile, he said, “Cushing is starting to gently rebuild and given the upside potential in Canadian crude oil imports we will not be overly concerned about the future stock levels in the US Midwest.”

Jakob reported, “Gasoline stocks were further reduced during the week due to a drop of production significant enough to result in a drop of implied gasoline demand (down 280,000 b/d vs. last year). Gasoline prices were leading the oil complex higher yesterday on the back of the stock draw, but the days of forward cover have been basically unchanged since mid-August and are at the highest level for the same week since 2001.”

He said, “Stocks of diesel and of heating oil were basically unchanged during the week and were only reduced in the intermediary 15-to-500 ppm category.”

Overall, the latest EIA report “is not providing a justification for the price action of the last 10 days and that reinforces in our opinion the argument that the current oil price rally is purely based on ‘QE expectations’ and will have to be traded accordingly,” Jakob said.

Energy prices
The November contract for benchmark US sweet, light crudes climbed as high as $84.09/bbl in intraday trading Oct. 6 on the New York Mercantile Exchange before closing at $83.23/bbl, up 41¢ for the day. The December contract advanced 35¢ to $83.99/bbl.

On the US spot market, West Texas Intermediate at Cushing was up 41¢ to $83.23/bbl. Heating oil for November delivery inched up 0.52¢ to $2.31/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.04¢ to $2.16/gal.

The November natural gas contract continued its rally, up 12.2¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 9¢ to $3.61/MMbtu.

In London, the November IPE contract for North Sea Brent crude gained 22¢ to $85.06/bbl. Gas oil for October escalated by $9.75 to $733.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $1.37 to $81.51/bbl. OPEC ministers are scheduled to meet Oct. 14 in Vienna, but at this point no one expects a formal change in the group’s production quotas although high prices may tempt some to produce beyond their current quota.

Contact Sam Fletcher at [email protected].