MARKET WATCH: Oil price continues to fall; bargain buying boosts gas price

Crude prices fell for the fifth consecutive session amid a record trading volume in the New York market on Apr. 13 and concerns of a world oversupply of oil.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 14 -- Crude prices fell for the fifth consecutive session amid a record trading volume in the New York market on Apr. 13 and concerns of a world oversupply of oil.

However, the front-month natural gas contract jumped by 3.8%, “mainly motivated by bargain hunting, as prices have dropped 18% year-to-date on the continuing supply glut and moderate spring temperatures,” said analysts in the Houston office of Raymond James & Associates Inc.

In New Orleans, analysts at Pritchard Capital Partners LLC reported “speculation that producers are finally feeling the brunt of continued low prices and may start to cut back output and drilling activity.” However, they said, “Prices have been seeing support around $4[/MMbtu] as consumers of the fuel step in to take advantage of low prices.”

Adding to market anxiety was a report from the International Energy Agency in Paris again raised its forecast for crude production outside of the Organization of Petroleum Exporting Countries to 600,000 b/d of annual growth (from its previous forecast of a 220,000 b/d non-OPEC increase) to 52 million b/d production for 2010, a 1.2% year-over-year increase (OGJ Online, Apr. 13, 2010).

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “At the current price of West Texas Intermediate and on a continued roll of the prompt contango, a long-and-hold position on the front month WTI will not make money over the next 12 months unless WTI moves above $97/bbl. Given that such a price would be met by a double-dipping of the economy and by Saudi Arabia opening the spigots, the risk-reward of a long-and-hold position in WTI related instruments is asymmetric to the downside. In the current market structure, passive investors need to move to the back of the curve, but given that one can hide but not run away from the contango, buying the back of the curve ($89.50/bbl May 2011) offers as well limited upside vs. the economy and OPEC.”

Oil and gas prices were up in early trading on the New York futures market Apr. 14.

US inventories
The Department of Energy’s Energy Information Administration said Apr. 14 commercial US crude inventories fell 2.2 million bbl to 354 million bbl in the week ended Apr. 9 when Wall Street analysts expected an increase of 1.3 million bbl. Such an increase would have been “the eleventh in a row and the longest such streak since 2004,” said Raymond James analysts.

Gasoline stocks dropped 1.1 million bbl to 221.3 million bbl in the same period, slightly beyond Wall Street’s consensus for a 1 million bbl decrease. EIA reported distillate fuel inventories increased by 1.1 million bbl to 146.8 million bbl, slightly above Wall Street expectations of a 1 million bbl build.

The American Petroleum Institute earlier reported crude stocks were up 1.4 million bbl to 354.4 million bbl, gasoline inventories increased 1.6 million bbl to 221.8 million bbl, and distillates gained 1.7 million bbl to 150 million bbl in the same week.

“As expected, the API revised last week’s estimate of crude oil in Cushing, Okla., [up] by 2 million bbl but with a further build during the week of 1 million bbl,” Jakob said. “API is still much below the levels of the DOE on the US Gulf [Coast] stocks. In distillates, there is still a very significant divergence between the API and the DOE, with the API higher by more than 4 million bbl. In gasoline, the API-DOE divergence is, however, minimal.”

According to the latest MasterCard Spending Pulse report, gasoline sales at the pump were down 3.6% last week and down 1.1% from the comparable period a year ago. However, Jakob said, “Comparing with the week of last year is distorted by the fact that last year the Easter break was 1 week later; and it is better to look at the 4-week average, which is [up] 1.1% vs. last year. That amounts to an increase of 107,000 b/d, which is the amount of additional ethanol blending required by the Environmental Protection Agency; hence the current growth of US gasoline consumption does not translate [into] an increase for petroleum gasoline, i.e. crude oil.”

Imports of crude into the US last week were down 681,000 b/d to 8.9 million b/d, EIA reported. In the 4 weeks through Apr. 9, US imports of crude averaged 9.2 million b/d, 10,000 b/d less than in the comparable period in 2009.

The input of crude into US refineries increased by 209,000 b/d to 14.8 million b/d last week, with units operating at 85.6% of capacity, said EIA officials. API earlier reported operating capacity up slightly to 84.8%.

EIA said gasoline production increased to 9.2 million b/d while distillate fuel production decreased slightly to 4 million b/d last week.

Energy prices
The May contract for benchmark US light, sweet crudes fell as low as $82.51/bbl in intraday trading Apr. 13 on the New York Mercantile Exchange before closing at $84.05/bbl, down 29¢ for the day. “The short-term momentum has turned from positive to negative, but there was enough buying on the dip to regain the important support level of $83.95/bbl on WTI. That level will likely remain the point of focus for today but given the current market structure (contango) and the across-the-board stock builds previewed by the API it will take deeper and deeper pockets to seek additional momentum buying on a new high ($87.09/bbl),” said Jakob.

“When we take in consideration the extraordinary volume that was traded on WTI yesterday, we have to be concerned (frightened might be a better word) about the deepness of the pockets that do not want to let WTI drop below the support levels,” he said. “Daily volume on WTI as been on the high side for the last few days, but the preliminary numbers for yesterday are just phenomenal and at 1.4 million WTI contracts exchanged it is a new record high…by very far. This is a new playing field.”

The June NYMEX crude contract lost 17¢ to $85.11/bbl. On the US spot market, WTI at Cushing was down 29¢ to $84.05/bbl, in lock-step with the front-month futures contract price. Heating oil for May delivery dipped by 0.47¢ to $2.21/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month continued to increase, however, up 1.35¢ to $2.31/gal.

The May natural gas contract rebounded by 15.2¢ to $4.16/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 3¢ to $4.01/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost 5¢ to $84.72/bbl. Gas oil for May dropped $12.50 to $700/tonne.

The average price for OPEC’s basket of 12 reference crudes declined 68¢ to $81.52/bbl.

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