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Crude fails to find support at $83 as US consumer sentiment drops

13th Mar 2010, 2:37 pm Crude fails to find support at $83 as US consumer sentiment drops

Crude prices rallied this week before falling sharply late Friday on mixed US economic data. Oil got a boost after the US Commerce Department said that retail sales unexpectedly increased 0.3% in February instead of an expected decline, improving the outlook for oil demand. However, the University of Michigan said its consumer sentiment index dropped from 73.6 to 72.5 during the month.

Crude’s rally was fuelled by this week’s inventories report from the Energy Information Administration (EIA), which came out on Wednesday showing a surprisingly low increase of 1.4 mmbbls (million barrels) in oil inventories a day after American Petroleum Institute (API) said crude stockpiles in the US added 6.5 million barrels, while a smaller increase was expected. The data also signalled a sixth straight week of expansion in oil inventories.

At the same time, EIA said that gasoline stockpiles and distillates, which include heating oil, were down fell 2.9 million barrels and 2.2 million barrels respectively to signal higher demand.

Chinese demand was once was a concern, curbing crude’s gains. An update, which came out middle through the week showed that inflation in the world’s second largest energy consumer increased to an annualised rate of 2.7% in February, triggering speculation of further monetary policy tightening after the country introduces a series of measures to curb lending in January to prevent the rapidly growing economy from overheating.

China later insisted that the rate was still within its annual target of 3%, though concerns persisted, but the pressure on crude was subdued closer to the end of the week when International Energy Agency (IEA), which revised its oil consumption forecast for 2010 upwards by 1.6 mmbbls/d to 86.6 mmbbls/d this year. The IEA also upped its global demand estimate for 2009 to 85 mmbbls/d.

The update came shortly after OPEC (Organization of Petroleum Exporting Countries) upped its demand forecast for the current year yesterday, projecting the global consumption to grow by an additional 0.9 mmbbls/d (million barrels per day) to 85.24 mmbbls/d provided that the ongoing economic recovery firms.

Goldman Sachs (NYSE: GS) added to the sentiment, saying that higher oil demand could drive the prices to US$92-97/barrel within the next three to six months.

Other bullish factors included further gains in the stock markets, which extended last week’s gains, easing concerns over whether the ongoing rally could be sustained.

Currencies were a factor with a stronger US dollar weighing on oil prices. The American currency gained against the euro late in the week, making US dollar-denominated commodities such as oil more expensive for holders of other currencies to curb demand.

Brent Crude for May delivery slipped just below US$80/barrel, while US light, sweet crude fell to US$81.24/barrel after nearing US$83/barrel late in the week.

Blue chip energy stocks were on the rise this week. Supermajors BP (LSE: BP) and Shell (LSE: RDSB) gained, as did fellow FTSE 100 constituent BG Group (LSE: BG). Cairn Energy (LSE: CNE) was the top performer in the sector in the FTSE 100, while Tullow Oil (LSE: TLW) went against the tide, posting a weekly loss after releasing its full year results on Wednesday.

Large and Mid Cap News

Petrofac (LSE: PFC) said that 2009 was another excellent year, and for the year to end-December 2009, the oil and gas company reported a 33% year-on-year increase in net profit to US$353.6m compared to US$265m in the previous year. Similarly earnings (EBITDA) were up 34% at US$559m and earnings per share also rose 34% to 103.19 cents.

Midcap oil and gas producer Premier Oil (LSE: PMO) achieved the primary exploration target of the 34/5-1 S wildcat well at production license 374 S in the Norwegian portion of the North Sea by making a petroleum discovery in the Cook formation, while the other formation Statfjord came up dry.

BP (LSE: BP) said it is paying Devon Energy Corp (NYSE: DVN) US$7.0 billion in cash for assets in Brazil, Azerbaijan and the US deepwater Gulf of Mexico, giving the UK oil major a material exploration position in the deepwater offshore Brazil and significantly enhance its position in core strategic areas.

Dragon Oil (LSE: DGO) has completed the initial testing of two Dzheitune development wells, A/142 and 13/143, at its Cheleken operation in the Caspian Sea. The wells were drilled to 3,961m and 3,450m, and tested at combined rates of 2,103 barrels of oil per day (bopd) and 2,168bopd respectively.

small caps

Dual-listed Rheochem Plc (ASX: RHE, AIM:RHEP), the oil and gas business with oil services, production, development and exploration assets, has acquired the remaining 50% shareholding of Zeus Petroleum Limited in a cashless transaction.

Gulf Keystone Petroleum (AIM: GKP) is set to increase its interests in Kurdistan by assuming 100% control of its GKPI operating subsidiary, following a material default by the company’s investment partner in Kurdistan, ETAMIC. Subject to total expenditure of US$52m the company will increase its net interests in each of the four Kurdistan based oilfields - Shaikan, Sheikh Adi, Ber Bahr and Akri Bijeel.

Ascent Resources (AIM: AST) has tested and completed the PEN-101 well in the Peneszlek area of the Nyrsieg exploration permits in eastern Hungary, which will commence production to sales immediately following the departure of the rig during the week of 15 March.

Xcite Energy (AIM: XEL) has announced the terms of its equity-based fundraising announced on 8 February. The company will issue shares at £0.40 per share to investors in the UK and at C$0.62 per share to North American investors. Xcite expects to raise aggregate gross proceeds of approximately £24.9 million (C$38.4 million). The proceeds will be used in the development of the Bentley oilfield in the North Sea.

BPC (AIM: BPC) has placed 69.8 million new shares to raise £2.4 million to meet its working capital requirements and reiterated its intention to re-domicile from the Falkland islands to the Isle of Man.

Europa Oil & Gas (AIM: EOG) has updated investors on the testing of the Hykeham-1Z well, which was drilled on the PEDL150 license, a short distance from the Whisby Field in the UK. After conducting a casing pressure test yesterday, the company has confirmed that the original perforation charges failed to penetrate the well casing, and therefore there is currently no connection to the reservoir.

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