MARKET WATCH: Energy prices rebound on weak dollar, mixed inventories

Energy prices rebounded Feb. 24 with many contracts regaining most of the previous day’s losses and crude oil closing at $80/bbl in the New York market on a mixed report of US inventories and a weakening US dollar.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 25 -- Energy prices rebounded Feb. 24 with many contracts regaining most of the previous day’s losses and crude oil closing at $80/bbl in the New York market on a mixed report of US inventories and a weakening US dollar.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “Crude oil rose, despite a weak inventory report, on dollar weakness and renewed economic growth sentiments after Federal Reserve Chairman Ben Bernanke said the economy is in a nascent recovery. Crude met step resistance and fell off $80 earlier in the week; if Bernanke follows up yesterday’s testimony with similar bullish economic sentiments, it could propel crude to stay afloat over $80.”

In his semiannual report to Congress, Bernanke also said the Fed needs to keep its key federal funds rate range at a historic low near zero for an extended period because of the fragile recovery of the US economy from recession.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Bernanke giving reassurance that money will still be freely for grabs for some time sent the dollar lower, equities higher, and crude oil went for the ride higher. The only problem is that when the dollar index rebounded later in the session, crude oil forgot to correct lower. The correlation between the dollar index and crude oil has been totally broken down this year, with crude oil following the movement on equities much more than on the dollar.”

Jakob reiterated, “There is nothing sacred about a dollar-to-oil intraday correlation; however, on a fundamental basis with oil rising in tandem with the dollar index we are getting much closer to the price zone of demand destruction while oil producers are maximizing revenues and can start to live with lower oil prices on a dollar basis.”

US inventories
The Energy Information Administration reported commercial US crude inventories climbed by 3 million bbl to 337.5 million bbl in the week ended Feb. 19, exceeding the Wall Street consensus for a 1.9 million bbl increase. Gasoline stocks dropped 900,000 bbl to 231.2 million bbl, counter to analysts’ expectations of a 600,000 bbl build. Distillate fuel inventories were down 600,000 bbl to 152.7 million bbl, less than the 1.5 million bbl drop anticipated on Wall Street (OGJ Online, Feb. 24, 2010).

The latest EIA numbers “are showing that US demand [for oil and petroleum products] is still stagnant, the only positive implied demand being in ‘other oils’ while demand for the main clean petroleum products (gasoline, distillates, and jet fuel) is still on the 4-week average down 340,000 b/d vs. the low levels of last year and down 848,000 b/d vs. 2008,” Jakob said. “Gasoline was again leading the complex higher, and this despite the end of the refinery workers’ strike in France (OGJ Online, Feb. 24, 2010).

Although EIA reported a draw of gasoline, Jakob noted, “The absolute levels of stocks are still at the highest levels for the same week since 1993 and the days-of-cover at the highest level since 1999. Gasoline stocks will show draws as we go deeper into the driving season, but this is the norm and we do believe that demand is still at risk. The US number of unemployed is 24% higher than a year ago (and double the levels of early 2008); combine this with US gasoline prices at the pump [that] are 40% higher than a year ago (and apart from 2008 at an historical high for end-February), add to it the low consumer confidence number, stagnant vehicles-miles-traveled, higher ethanol blending…with those inputs we still have a difficult time to draw a picture where demand is so buoyant that it needs to drive prices to a retest of historical highs.”

Natural gas
EIA reported the withdrawal of 172 bcf of natural gas from US underground storage in the week ended Feb. 19. That left 1.85 tcf of working gas in storage, down 56 bcf from a year ago and 13 bcf above the 5-year average.

Pritchard Capital Partners said, “Temperatures last week were 6% colder than normal, 14% colder than last year, and 8% warmer than the prior week. Winter so far (Nov. 1 through Feb. 18) is 79% complete and has been 3.7% colder than normal [on a 10-year average].” They said, “We believe that despite one of the strongest heating load seasons on record, the street will continue to have bearish sentiments for natural gas, as supplies have held firm, meeting demand adequately owing to the shift in natural gas supply dynamics from ongoing drilling and completion efficiencies in North American natural gas shale plays. Furthermore, we believe the reversal of coal-to-gas fuel switching and demand associated with it, combined with the availability of new LNG supplies, will dampen any sharp appreciation in natural gas prices.”

In addition, Jakob said, “A very harsh winter has not resulted in any significant drawdown of heating oil in the East Coast, and this leaves very little tank shell capacity for any further stock builds of clean petroleum products.”

Meanwhile, airlines canceled hundreds of flights, schools closed, and officials prepared to shut down major roads due to more forecasts of heavy snow in the Northeast from Philadelphia to New York. Storm warnings also were issued for Ohio, the Appalachian Mountains, and as far south as North Carolina.

Energy prices
The April contract for benchmark US sweet, light crudes climbed $1.14 to $80/bbl Feb. 24 on the New York Mercantile Exchange. The May contract gained $1.09 to $80.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.14 to $80/bbl. Heating oil for March delivery inched up 0.98¢ to $2.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 3.33¢ to $2.10/gal.

The March natural gas contract gained 3.8¢ to $4.82/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2¢ to $4.94/MMbtu.

In London, the April IPE contract for North Sea Brent increased 84¢ to $78.09/bbl. Gas oil for March advanced $2 to $630.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 29¢ to $75.46/bbl. The OPEC office in Vienna will be closed Feb. 26.

Contact Sam Fletcher at samf@ogjonline.com.

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