MARKET WATCH: Crude oil, natural gas prices retreat

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 14 -- After briefly topping $60/bbl in the previous session, oil futures prices fell May 13 on the New York Mercantile Exchange despite a government report of an unexpected drop in US inventories, the first in 10 weeks.

Crude prices continued to decline in early trading May 14 "on news that the International Energy Agency reduced its 2009 demand forecast for the ninth consecutive month," said analysts in the Houston office of Raymond James & Associates Inc. "On the natural gas front, natural gas prices dropped nearly 3% [May 13] on a report by the Energy Information Administration that industrial consumption of natural gas will drop by 8% this year. The EIA is forecasting that total US natural gas will fall by 1.9% in 2009, which compares [with] our estimate of a 3% decline."

In New Orleans, analysts at Pritchard Capital Partners LLC said the oil price decline was the likely result "of demand concerns, lower equity prices, a stronger dollar, and poor retail figures weighing on optimism of an economic recovery and as a result lower energy demand."

The EIA said commercial US crude inventories fell 4.7 million bbl to 370.6 million bbl in the week ended May 8, compared with Wall Street analysts' expectation of a 1 million bbl increase. Gasoline stocks dropped 4.1 million bbl to 208.3 million bbl in the same week. Distillate fuel inventories increased 1 million bbl to 147.5 million bbl (OGJ Online, May 13, 2009).

However, crude inventories were not reduced by increased demand but by "a sizeable (12%) drop in imports," said Pritchard Capital Partners. Gasoline inventories fell because of 1.6% decline in refining run rates, low gasoline imports, and improved demand. The analysts said, "Demand for all products is still at 10-year lows and year-to-date collections show gasoline down 0.9% year-over-year, distillate down 8%, and all petroleum products down 5.7%. Some anecdotal evidence suggests that the slight recovery in gasoline demand witnessed at the end of the first quarter may have given way to further year-over-year erosion."

Nevertheless, Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London, said, "After 7 months of constant increase, the US [crude] inventory overhang seems at last to have peaked. He said, "From the time of the deepening of the financial crisis and the recovery of oil operations from the hurricanes, through to the middle of April, US inventories rose from nearly 50 million bbl below their 5-year average to more than 90 million bbl above. The rise in inventories above normal seasonal patterns amounted to some 140 million bbl over the course of about 210 days, i.e., an abnormal rise of some 650,000 b/d across 7 whole months."

Horsnell said, "Over the 2 previous weeks, the overhang above the 5-year average had declined by 3 million bbl, and in the latest data it has declined by a further 9.1 million bbl. The overhang is still large at 80 million bbl, but over the past few weeks it has become an overhang that is being whittled away and not added to by the flows. If the peak inventory overhang has been passed, and the drop of 12 million bbl from the putative peak is of sufficient scale to provide some encouragement to that view, then that is an important change in the market dynamic. It would tend to support both the recent move up of the trading range and also to encourage a continuation of the recent significant narrowing in both the West Texas Intermediate and [North Sea] Brent time spreads."

Refining outlook
Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Although the headline data of declining gasoline inventories is positive for refiners, the underlying supply-demand fundamentals remain very weak. The average US refinery utilization rate of 80.4% last week was more than 6% below year-ago levels, while demand for light products (gasoline plus distillate plus jet fuel) was 7% below the same calendar week of 2008, according to the EIA data. Potential for a summer demand-driven recovery appears to be waning; thus refiners must keep production low in order to support margins, in our view."

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, "Implied [US] demand for gasoline on the 4-week average is calculated to be down 235,000 b/d vs. a year ago, but it is offset by gasoline imports that are much lower than a year ago (down 318,000 b/d). Given the lower gasoline imports, refiners are producing slightly more than a year ago (up 24,000 b/d) and for that they need to keep the crude oil inputs relatively high compared to the overall drop in demand."

However, he said, "The problem is that distillate demand is down much more than gasoline demand, hence as refiners run for gasoline demand they keep on adding to stocks of middle distillates, and storage capacity is missing. Combined US stocks of middle distillates and gasoline are basically at recent historic highs and the unwanted distillates that refiners are producing need to chase gasoline out of storage capacity. If US refiners do not cut runs more aggressively, then they need to run a fine balancing act of running gasoline into minimum of inventory to free some storage capacity for distillates."

Jakob said, "One way or another it means that gasoline could remain exposed in the future to supply disruptions while there is already enough distillate to cover next winter, and this then draws a picture where the gasoline premium to distillate could still have some further upside."

IEA reports
For the ninth consecutive month, IEA reduced its previous forecast of oil demand, down 230,000 b/d in its latest adjustment to a total 83.2 million b/d, 3% below 2008 demand. "Continued oil demand weakness is premised on strong economic recovery later this year remaining elusive," said EIA officials (OGJ Online, May 14, 2009).

Only a day earlier, the Organization of Petroleum Exporting Countries reduced its 2009 demand growth forecast by 200,000 b/d to 1.6 million b/d to 84 million bbl (OGJ Online, May 13, 2009).

IEA said world oil supply averaged 83.6 million b/d in April, up 230,000 b/d from March because of increased OPEC output after the cartel had reduced production over the previous 7 months. OPEC's total production increased 270,000 b/d to 28.2 million b/d. The 11 OPEC countries other than Iraq increased production by 230,000 b/d to 25.8 million b/d, compared with their target of 24.845 million b/d.

IEA officials expect total non-OPEC supply to slip from 50.6 million b/d in 2008 to 50.3 million b/d in 2009, offset by a similar rise in OPEC NGL production.

Natural gas
Energy Solutions Inc., Verona, Wis., advisor to gas purchasers, said May 13, "The perception of a recovering economy, along with rising crude oil prices, have also provided support for natural gas prices. The value of the US dollar recently hit a 4-month low, and that has been a contributing factor to stronger crude oil prices. Weakness in the dollar, which is expected to last into late June, has trumped the fact that US crude oil inventories have reached 19-year highs, and there is an estimated 100 million bbl of crude oil being stored at sea on tankers. There is nothing bullish about crude oil fundamentals."

Company analysts reported, "Right now, fundamentals don't matter—particularly for natural gas prices. In just 1 week, the front-month natural gas NYMEX futures contract rallied by more than $1/MMbtu, surpassing a number of technical resistance price levels. The June natural gas NYMEX contract is now trading at a price level comparable to where it traded in the second half of March. We believe the primary culprit for the recent price rise in natural gas is a combination of short-covering by speculators and a surge in the purchase of shares of [Denver-based] United States Natural Gas Fund LP (UNG), an exchange-traded fund, which is designed to track in percentage terms the movements of natural gas prices."

Energy Solutions said, "When money is invested into UNG, it initiates the purchase of the underlying portfolio of products (i.e. the purchase of natural gas futures contracts). If this buying is aggressive, natural gas prices will rise quickly."

Energy prices
The June contract for benchmark US sweet, light crudes fell 83¢ to $58.02/bbl on NYMEX. On the US spot market, WTI at Cushing, Okla., was down the same amount to the identical price. The July contract dropped 74¢ to $58.97/bbl on NYMEX. Heating oil for June declined 1.7¢ to $1.49/gal. However, the June contract for reformulated blend stock for oxygenate blending (RBOB) gained 2.09¢ to $1.69/gal.

Natural gas for June fell 11.6¢ to $4.33/MMbtu on NYMEX. "The decline may have been the result of weaker equity prices, lower crude prices, and profit taking after natural gas spiked after last week's 22% advance in June NYMEX prices," said Pritchard Capital Partners. On the US spot market, gas at Henry Hub, La., increased 2¢ to $4.39/MMbtu.

EIA reported the injection of 95 bcf of natural gas into US underground storage in the week ended May 8. Working gas in storage exceeded 2 tcf. That was 497 bcf more than in the same period a year ago and 374 bcf above the 5-year average.

In London, the June IPE contract for North Sea Brent crude dropped 60¢ to $57.34/bbl. The June gas oil contract gained 50¢ to $483.75/tonne.

The average price for OPEC's basket of 12 reference crudes advanced 40¢ to $57.16/bbl on May 14.

Contact Sam Fletcher at samf@ogjonline.com.