MARKET WATCH: Energy prices continue to rally

Energy prices generally continued to rally Aug. 30 on investors’ increased appetite for risk, despite the American Petroleum Institute’s early report of a hefty increase in US crude inventories.

Gasoline prices moved sharply higher on the API’s report of a large draw on US gasoline stocks while heating oil prices “broadly tracked crude moves,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “By comparison, European product cracks weakened across the barrel, which dragged the overall refining margins lower by about 50¢/bbl. Term structures for Brent and West Texas Intermediate both strengthened on fairly tight supply and shifts in hedging activities,” he said.

“In the Eurozone, both the Economic Sentiment Index and Consumer Confidence for August fell, which added to a list of signs that the Eurozone economy is losing steam,” Zhang said.

Meanwhile, US consumer confidence dropped to the lowest level since April 2009, according to the Conference Board. However, the US equity market received a boost from the released minutes of the most recent meeting of the Federal Open Market Committee (the policy-making arm of the Federal Reserve Bank) indicating a third round of “quantitative easing” (QE3) to stimulate the national economy was debated during the group’s Aug. 9 meeting.

Those minutes also showed Fed officials “were surprised by the recent slowdown in economic growth,” said analysts in the Houston office of Raymond James & Associates Inc. “Some members noted that the unemployment rate stagnated and expressed equal concern over regulatory uncertainty, fiscal policy, and consumer sentiment,” they said.

“The broader market was more optimistic as it anticipated another round of monetary easing (possibly at the next Federal Reserve meeting in mid-September) and looked forward to President Barack Obama's job plan [to be announced] next week,” they said.

Also on Aug. 30, the Energy Information Administration under the Department of Energy released its natural gas supply data for June, “which showed Lower 48 [gas production] volumes flattish (up just 80 MMcfd) sequentially, while May volumes were revised up 170 MMcfd,” Raymond James analysts reported. They noted, “EIA has put out upward revisions each of the past 8 months (averaging an increase of 15 MMcfd for each revision). Translation: We would not be surprised if June ends up showing more growth when the numbers are revised next month. We also note the [natural gas production in the] Gulf of Mexico continues to bleed, down 4.3% sequentially and down 15% year-over-year (almost 1 bcfd).”

In other news, DOE revised total US monthly demand higher by 273,000 b/d, “which is a change of revision pattern from recent months,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “US gasoline demand for June was revised sharply lower by 260,000 b/d while demand for distillate was revised sharply higher by 310,000 b/d. For June, the US gasoline demand is at the lowest level since 2001, while distillate demand is at the highest level since 2007. Overall US oil demand (excluding LPG) is down 1.8% vs. a year ago and basically at par to the levels of June 2009 and 1.6 million b/d lower than June 2007.”

Looking at the aggregate June numbers for the US, Brazil, and Mexico, Jakob said, “Distillate sales were higher by 169,000 b/d vs. last year; the increase coming basically from the US. For the first 6 months of the year, the aggregate distillate demand is higher by 115,000 b/d, and higher by 514,000 b/d vs. 2009.”

He said, “The positive impact from Brazil in gasoline is due more to the switch from ethanol to gasoline, and this will be reenforced now that Brazil has decided to reduce the anhydrous ethanol content [of its gasoline] from 25% to 20% as of October.”

Jakob also observed, “It is interesting to note the DOE report that the US imported 1 million bbl of crude oil from Libya in June (nothing in April and May). The Libyan crude oil [was] discharged in Hawaii. The tanker Equator had loaded 1 million bbl from the rebel-held area in early April and then had sailed East, refueling in Singapore supposedly for China, but it looks like that it finally made its way to Hawaii.”

US inventories

EIA reported Aug. 31 commercial inventories of US benchmark crude jumped by 5.3 million bbl to 357.1 million bbl in the week ended Aug. 26, burying the Wall Street consensus for a 500,000 bbl withdrawal. Gasoline stocks dropped 2.8 million bbl to 208.6 million bbl in the same period, outstripping analysts’ predictions for a 1 million bbl draw. Finished gasoline inventories increased while blending components stocks decreased. Distillate fuel inventories increased 400,000 bbl to 156.1 million bbl, slightly below market expectations of a 500,000 bbl gain.

Imports of crude into the US escalated by 799,000 b/d to 9.6 million b/d last week, EIA reported. In the 4 weeks through Aug. 26, crude imports averaged 9.2 million b/d, down 441,000 b/d from the comparable period in 2010. Gasoline imports last week averaged 608,000 b/d, while distillate fuel imports averaged 176,000 b/d.

The input of crude into US refineries declined by 219,000 b/d to 15.4 million b/d last week, with units operating at 89.2% of capacity. Gasoline production increased to 9.6 million b/d last week while distillate fuel production increased to 4.7 million b/d.

Energy prices

The October contract for benchmark US light, sweet crudes climbed $1.63 to $88.90/bbl Aug. 30 on the New York Mercantile Exchange. The November contract increased $1.62 to $89.19/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.63 to $88.90/bbl.

Heating oil for September delivery gained 5.9¢ to $3.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 8.94¢ to $3/gal.

The new front-month October contract for natural gas rose 7.9¢ to $3.91/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., slipped 0.8¢, also closing at $3.91/gal.

In London, the October IPE contract for North Sea Brent was up $2.14 to $114.02/bbl. Gas oil for September gained $10.25 to $973.50/tonne.

The Organization of Petroleum Exporting Countries office in Vienna was closed for a religious holiday and no price update for its basket of 12 benchmark crudes was available.

Contact Sam Fletcher at [email protected].