Morning Petrospective – September 22, 2010       

he oil complex was under selling pressure from the start yesterday, dropping in trading overnight and early Tuesday morning despite stronger equities prices in Asia. Asian investors were following the DJIA’s lead from Monday, and they were higher Monday night and then again Tuesday morning. The euro, which was stronger overnight and through the morning, was not able to help, and this placed additional distance between the euro and oil prices, which have been separating from each other over the last two weeks or so. While it is not certain that the two markets will go their separate ways, it is starting to look more and more likely. Yesterday placed another wedge in the separation process. And, when equities turned lower, oil prices really started to unravel.

After the Fed meeting, at which the governors expressed concern for the anemic pace of growth, the euro rallied further and the stock market added to its gains. Noticeable, though, among those markets that did not benefit from the late afternoon rally was the oil complex. The euro advanced and equities gained more, but oil prices simply refused to do much more than pare the day’s losses slightly.

It is a funny thing, but it seems that it took the Enbridge Pipeline to remind this market what it was really based on. Prices rallied strongly after the pipeline went down, even though it was a small amount of oil in the grander scheme of things. And, once the pipeline came back online, the market reacted like a new field had come into production. But, since that time, traders have been much more interested in the supply and demand of oil, rather than the outside influences of equities or currencies. Tuesday’s activity may well have represented a major separation in the relationship, although we would be cautious in proclaiming the death of the relationship between the stock market or the euro with oil prices.

The euro was higher on the “open door” left by the Federal Reserve for further quantitative easing, should it be needed. And equities were higher on the news that housing starts were up 10.5%, to 598,000, in August, from 541,000 in July. The stock market took it as a positive sign for the economy, although Capital Economics was quick to point out that, even though they are “11% above June’s low,” that they remain “12% below the 679,000 seen in April.” And CE also said it is even “more striking” that “they are nowhere near the 1.4 million or so that is the mark of a healthy market.” So, there was improvement, and that got equities moving higher, but we are still far from being out of the woods in terms of economic growth. Still, it was important to see building permits rebound from a record low.

It is an apparently lingering remnant of last week’s Enbridge Pipeline event that oil prices effectively ignored the reaction of equities and currencies and remained focused on their own fundamentals. These remain stark by any measure, and this week’s latest measure of supply and demand was decisively bearish.

This week’s American Petroleum Institute (API) report showed a build of 2.231 million barrels in crude oil stocks, a build of 2.422 million barrels in gasoline stocks and a build of 2.509 million barrels in distillate stocks. Crude oil imports were up 313,000 bpd to 9.220 million bpd, and refinery utilization was down 0.2% to 85.4%. Implied demand in gasoline came in this week at just 8.760 million bpd, while implied distillate demand registered only 4.210 million bpd. Taken together, these were the worst demand numbers in weeks.

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Platts oil

• Australia's Santos plans to take the final investment decision on its coalseam gas-based Gladstone LNG project in "early Dec" this year.
• China commercial crude inventories excluding strategic reserves was up in Aug with stocks at the end of the month up 3.4% from Jul.
• Most Indian refiners are on track to complete upgradation to produce gasoil equivalent to Euro III and IV specifications.
• Alaska state agencies will review oil industry facilities and pipeline maintenance programs as a part of tightened regulation and oversight.

Bentek Energy

• Power Burn Analytic Report - Little Change in U.S. Power Burn as Increase in the NE Offsets All Declines
• Canadian Observer - Western Canadian Storage Inventories Well Above Last Year
• Industrial End Users Analytic Report - Key Manufacturers See Increase in Natural Gas in 2010
• Supply/Demand Balance Analytic Report - U.S. Demand Lower Today Despite Heat in the Northeast

Bloomberg 

• Crude Oil Rises in New York on Forecast of Supply Decline, Weaker Dollar
• Georgette Nears Mexico's West Coast as Thunderstorms Build Up in Caribbean
• Russia, China to Build $5 Billion Refinery, Extend Gas Talks
• Crude Price Forecasts for 2010, 2011 Cut by ANZ Bank on High Inventories
• CME to Start Trading on Oil, Gold Volatility Indexes in Fourth Quarter

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