Morning Petrospective – September 27, 2010       

il prices advanced yesterday as traders reacted to the strongest euro values since April. It was a strange case of disappointing economic news lending weight to speculation that the Fed will end up taking fresh steps to stimulate the economy. The expectation is that the Fed will purchase assets in the exercise known arcanely as “quantitative easing.” One of its side effects is to push US interest rates even lower – and that, in turn, drives investors to ‘higher-yielding currencies,’ or into currencies from countries with higher interest rates. As the week ended, investors were focusing on these factors and were ignoring equally valid signs that central banks could buy dragging greenbacks to maintain exports.

Currency investors were also encouraged by Germany’s “Ifo” business sentiment index, which contradicted earlier (in the week) signs that Europe’s largest and most dynamic economy might be losing steam. The sentiment index came in at better-than-expected levels, rising to 106.8 in September from 106.7 in August. Expectations had been calling for a drop to 106.5. So many new and strange numbers have entered our lives as oil traders recently. In any event, those numbers were bullish in Europe and for currency traders.

And, at the same time that the euro was posting large gains on speculation that the US economy had gotten so weak that the Fed must act, US equities were sailing higher towards a 4 PM standing ovation on the floor of the NYSE. The Commerce Department reported that new home sales in August were steady against July’s figures, which Commerce revised higher from their initial levels. Investors in US equities saw in the steady figures signs that the US economy is strengthening, and they were buying stocks on the strength, at the same time that currency traders were buying euros based on perceived economic weakness (and an anticipated Federal Reserve response). On Friday, the DJIA rallied 197.84 points to finish the day at 10,860.26, its highest level since the early days of May, just after the “Flash Crash.”

Also helping oil prices was the expectation that refiners will follow normal seasonal maintenance schedules this fall. Refineries normally take units down for seasonal maintenance after Labor Day, and the cleaning and refurbishment usually runs through Thanksgiving. We typically se refinery rates rebound in December, before the heaviest maintenance of the year begins in January (and lasts until the middle of May). Traders reacted to news that Exxon had scheduled turnarounds at a number of refining units at its Beaumont, Texas refinery (344,500 bpd) as if the work had been suddenly forced on the plant.

This is a peculiar new trend that started this week with the announcement that Conoco is bringing in new equipment at its Linden, New Jersey refinery (238,000 bpd). Traders reacted as if the refinery closure had come out of the blue. And, with refiners having been able to take units down more frequently this year, because demand has been lower, we enter this turnaround season in the best state of repair in years, possibly even decades. For most of the nineties, through the “oughts,’and then after the hurricanes of 2005 and 2008, refineries were forced to run all out to keep up with demand. During the worst of this period, after Hurricanes Katrina and Rita, those more northern refineries spared by the storms had to cancel scheduled maintenance to pick up the slack left by refineries under water in Texas or Louisiana. Now, American refineries are in their best state of repair for many years. And that fact has changed the dynamics leading to voluntary cutbacks. Once margins fell below a certain level, it used to make more sense to take units (run hard for years) down for maintenance. Since they have almost all had recent work done, the margin levels that are acceptable are much lower. Refiners would rather defray fixed costs by running units at marginal rates of return than take them down – and the need to take them down is diminished.

And, yet, for some reason, oil traders have seen scheduled maintenance recently as being bullish … in a market with more oil in storage than at any point in three decades. Scheduled maintenance should not be considered bullish in the fall of 2010.

In other news, Tropical Storm Matthew made landfall in Nicaragua and was weakening.

     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

• Halliburton defends Macondo job, says BP ignored red flags.
• Japan to postpone 1.13 mil barrels Sep SPR crude sales tender.
• Gazprom and CNPC have signed key terms for future supplies of Russian gas to China that are slated to start in 2015.
• Staggering: Pipdev analyst at Platts refining conf says cost of diesilization of bunkers will be $100 bil.
• Workers at Total's French refineries are back at work after extending Thursday's national strike into Friday.
• At Platts Europe Refining conference, we are just 1 hour in. "Overcapacity" has been uttered 1,937 times already.

Bentek Energy

• Gulf Coast Production Analytic Report - Texas Onshore Production Down Over the Weekend
• Power Burn Analytic Report - U.S. Power Burn Declines 24% Over the Weekend
• California SW Observer – California/SW Demand Up 1.1 Bcf Today
• Supply/Demand Balance Analytic Report – U.S. Production Holds Steady Near 62 Bcf/d Over the Weekend

Bloomberg 

• Crude Oil Trades Near Two-Week High as Equities Counter Demand Concern
• Hedge Funds Raise Diesel Bets as Exports to Europe Double
• Russia, China Expand Relations With Gas, Oil Accords
• Spain's Endesa to Sell 80% of Gas-Distribution Assets to Two Goldman Funds
• Gasoil East-West Spread at Widest in 18 Months on European Demand
• Natural-Gas Futures Decline After Storm Threat Eases in the Gulf of Mexico

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