Energy prices rose sharply yesterday, teeing off on the somewhat bullish EIA figures, which showed gasoline inventories falling more than expected amid improving demand. We also suspect that much of the rally was attributable to short covering, particularly after prices punched through modest resistance around the $40 mark basis April WTI.
With respect to the individual breakdowns, the EIA showed a sharp 3.4 million barrel dip in gasoline stocks, which was well ahead of a 100,000 barrel draw expected. Crude stocks rose by 700,000 barrels in the latest week, (about half as much as expected), but the increase was nevertheless enough to take total inventories to their highest level since July 2007. Stocks in Cushing fell by 400,000 barrels, the first decline in some eight weeks, and perhaps a sign that supply/demand balances are in fact starting to tighten, at least from a terminal point of view. Distillates rose by 800,000 barrels versus a forecast draw of 1.3 mb, and was the only negative reading in the data, but as the US winter starts to wind down, the impact of this category should recede in importance. (See our charts on pg. 3).
Demand numbers were mixed. The EIA noted a 1.7% rise in gasoline demand over the past four weeks, offsetting the 1.6% year-on-year decline seen in distillates. Importantly, total product demand was off by .8% during the four-week period. Rounding up the rest of the numbers, imports fell 24,000 bpd to 8.7 million barrels a day, while refinery utilization fell by 0.9% to 81.4% of capacity, much larger than forecast.
Crude oil prices could work slightly higher from here, (likely in fits and starts), as we approach the OPEC meeting, and as participants begin to discount another likely cut. However, even if OPEC was to go ahead with its cut, we have our doubts that prices will move substantially above the $50 mark; that seems to be a fair price for oil right now given the poor macro backdrop and the long lead time the markets will need to evaluate whether the massive stimulus and bank stabilization programs that the US government has introduced are indeed working.
Later on Thursday, we get January US durable goods data, as well as new home sales readings. Existing home sales were out on Wednesday, and these came in on the light side, causing US equity markets to stumble. The government reported that sales dipped by 5.3% from December to an annualized rate of 4.49 million units. Some of the decline could be attributable to home buyers holding back as they waited for incentives in the recent stimulus bill to come out. The numbers did contain some good news in that the inventory of existing homes fell to 3.6 million units from 3.7 million in December, and well off from a peak of 4.58 million seen last July. However, because of a parallel decline in sales, the supply of unsold homes ticked higher to 9.6 months.
In Other News from Reuters...
* The Venezuelan Finance Minister confirmed again on Wednesday what the markets are perhaps already starting to discount, namely that OPEC expects to propose new output cuts when the group next meets on March 15th.
* EIA natural gas storage data is expected out later on Thursday, and should fall by 108 bcf. For the same week last year, stocks fell by an adjusted 157 bcf, while the five-year average decline was 145 bcf.
* Valero said the 50,000 bpd coking unit at its 210,000 bpd refinery in Delaware City, Delaware, remained shut after unsuccessful restart attempts. Repairs on the unit are expected to take 40 to 45 days to complete.
* US oil company executives told Congress that more offshore areas should be opened to drilling to increase domestic energy supplies. Congressional and presidential bans on expanding offshore drilling expired last year. “Here in the U.S., we have deliberately constrained our own supply by limiting access to promising areas for leasing, exploration and development,” said the president of BP America. He went on to say that government estimates predict that restricted offshore areas could hold 17.8 billion barrels of oil and 76 tcf of natural gas.
* Iran said it plans to increase its uranium enrichment capacity 10-fold in the next five years. “Our plans to install and run centrifuges is not based on political conditions ... We have neither slowed down or accelerated our work there,” said one government official. He added that a new nuclear achievement would be announced on April 9.
* China’s National Development and Reform Commission said that the country’s fuel consumption is forecast to be on the low side this year, but did not provide any figures. China’s oil demand has been shrinking since November, as annual economic growth slowed to only 6.8% percent in the fourth quarter from 13% for the whole of 2007.
* Mexico’s Pemex said its oil and gas discoveries in 2008 were up 30%-35% on the year. “During 2007, 1.053 billion barrels of crude equivalent were incorporated and we estimate that during 2008 we incorporated 30 or 35 percent more,” the company’s CEO said.
European North Sea crude oil quotes as reported by Reuters: Forties for loading March 14-16 sold at April minus 60, equivalent to dated minus 5 cents. Oseberg for loading around March 20 and March 23 offered at dated BFOE plus a premium of $1.20 and Statfjord for loading March 23 offered at dated plus $1.10. Gullfaks for March 28 offered at dated plus $1.95.
U.S. gasoline/distillate quotes as reported by Reuters: In Gulf Coast trading, M3 was up 2c at 8.5c under April. On distillates, prompt ULSD was down half a cent at 1c under and low sulfur diesel was also down a penny at 1.25c under. In New York Harbor, heating oil was at March futures even, ULSD was at 4c over March, low sulfur diesel was at 1c over and jet was at 5c over.
All known news and events may have already been factored into the price of the market