Morning Petrospective – September 13, 2010       

il prices started trading erratically and in larger-than-normal-sized figures early Friday morning on Globex, and they had a peculiarly strong day to end the week. Prices were higher early Friday in trading in Asia and electronically and they had two fairly decent-sized selloffs followed by equally large rallies before the Nymex ever opened. Higher equities prices gave the market its firmer early morning tone, but prices really surged as traders started to take on board a leak in the 6a pipeline in Illinois (670,000 bpd) run by Enbridge Energy Partners. This pipeline carries crude from Canada to the upper Midwest, and it had had an earlier rupture in Michigan in July.

The price response struck us as being way out of proportion to the loss of barrels. Prices were up more than $2.00 a barrel as traders covered short positions on the fear that the loss of this pipeline, even for a brief period, could somehow quickly convert huge national inventory surpluses into dire regional shortages. It is too soon to say that the loss might not turn serious, but it is equally early to be turning this into a supply crisis.

It certainly will take time and effort to fix the rupture, but bigger pipelines with larger holes have been fixed - while workers have been under fire from armed and hostile locals. We are pretty confident that that is not going to be the case in Illinois or Michigan. And, we currently have oceans of oil in inventories. The loss of nearly 700,000 bpd is going to be hard on Enbridge and might even be difficult for nearby refineries, but only for a while. We just cannot see it being a long while. And, even if it turns out to take longer than expected or desired, this is just about the best time in the history of American oil use for there to be a supply problem.

Experts are already suggesting that work should be started quickly, and they believe that there will be plenty of options for re-routing the crude to refineries. Even though details were still sketchy, few observers felt that we would be looking at anything protracted or drawn out.

But, that then begs the question, “Why did the market react as if this had been a military operation carried out against a lonely pipeline carrying the world’s most critical incremental barrel?” OK, maybe we exaggerate a little. But, still, a two dollar rally on a pipeline break here at home, in the heart of an easily accessible system, in a world awash with crude oil, seems a bit much. There were technical magnifiers, such as having prices pierce the 50 and 100-day moving averages, Dow Jones pointed out. And we have Igor, the slow-moving tropical depression roaming the Atlantic like a lumbering troll. Perhaps, it is just all too much going into the weekend after a holiday-truncated week.

Some observers interviewed on television on Friday thought that there might have been buying on the back of President Obama’s comments or answers given to questions about the economy. Others felt that this week’s better-than-expected unemployment report had re-energized recently dormant risk appetites. Others saw it as a strong reaction to a rally of 47.53 (to 10,462.77) in the DJIA. And still others saw Friday’s strength as a late reaction to the week’s DOE report, which had shown draws in the three main inventory categories.

We continue to see it as frighteningly resilient in a market that saw an increase in existing inventories of 13.6 million barrels in comparison with two years ago (crude, distillate, gasoline, jet and residual fuel inventories) in the week’s DOE statistics. We know that investors continue to have a soft spot for oil as an asset class, but everything we know about it as a commodity tells us it was overpriced before Friday’s surprisingly strong finish. Something just doesn’t seem right here.

     FMX Newswire       

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Platts oil

• China's state-owned Sinopec expects construction work on its Shandong LNG terminal to be completed by late 2013, a company source said.
• Enbridge Energy Partners said it has recovered 6,050 barrels of the crude that leaked on a segment of the 670,000 b/d Line 6A on Sep 9.
• Chinese refiners Aug crude throughput rose 6.67% year on year to 34.73 mil mt (8.21 mil b/d), according to the National Bureau of Statistics.
• ExxonMobil has shut the bigger of two crude distillation units at its Trecate refinery near Milan, Italy, after a fire on Saturday.
• Iraq has told at least two term lifters of its Basrah Light crude that their volumes will be cut by 10% in October.

Bentek Energy

• Power Burn Analytic Report - U.S. Power Burn Expected to Average 19.8 Bcf/d Through Remainder of Sept.
• Gulf Coast Production Analytic Report - End of Outage on Exxon HOOPS System May Return Some Offshore Production
• Rockies Observer - Maintenance to Put Downward Pressure on Rockies Basis

Bloomberg 

• Oil Rises For Second Day Amid Optimism Over Economic Growth in U.S., China
• Hedge Funds Become More Bullish on Oil First Week in Five
• OPEC in Comfortable Middle Age, Turns 50 Years Old Tomorrow
• Fatal Gas Blast Prompts Scrutiny of Aging U.S. Fuel Pipelines
• Hurricane Igor Gains Strength Over Atlantic; Julia Forms Off West Africa
• Reliance Said to Plan Startup of Unit at Jamnagar Refinery Early Next Week

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