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Friday, October 23, 2009

Oil set to record fourth consecutive weekly gain

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The crude oil market looks set to record a fourth consecutive positive trading week, crude prices having risen approximately 4% since Monday. The week has seen a fairly broad level of support, the market has found impetus from rallying equities and improving demand outlooks as many US majors released positive results. Overnight oil trading was spurred on further by Chinese economic data which revealed that the People’s Republic of China (‘PRC’) experienced improved levels of growth, expanding 8.9% in the third quarter.


On London’s Intercontinental Exchange (ICE), WTI futures have fallen back to $81 per barrel since hitting $81.70 overnight.


Another key influence on the oil price this week was the increasingly contentious, analyst outlook on the US supply fundamentals.


Wednesday’s inventory report from the Energy Information Administration (EIA) showed that Crude supplies rose by 1.3m barrels, which was marginally less than the anticipated 1.5m, Gasoline supplies fell by 2.2m barrels against expectations of an 850,000 barrel decline.

It would appear that the oil price has been moving in direct response to the headline numbers, however many analysts and market commentators have keen to point out some of the detail and context of the current supply situation in the oil market. While the headline figures represent a ‘better-than-expected’ result commentators argue that they should not gloss over the challenging environment.

According to yesterday’s report US refiners supplied 3.3% less gasoline last week, a further decline from a 4% reduction from the week before.  Energy Department said that they have kept offline about 19% of their refining units.

Commentators also point out that despite the decrease over the past two weeks, US supplies of refined distillates are at a 25-year high. The US currently has stockpiled more than 29m more barrels of oil than this time last year. Additionally OPEC identified that internationally approximately 125m additional barrels of oil are currently stored in offshore tankers.

The apparently conflicted supply outlook seems to vary considerably between reports and context.

Also this week, the Organisation of Petroleum Exporting Countries (OPEC) has expressed concerns over the recent crude oil rally. Yesterday Secretary General Abdallah Salem el-Badri warned that the rise in prices was not linked to supply and demand in the oil market. Instead el-Badri identified a weak dollar and recovering equity markets as cause of the rally.

The Secretary General stated that sustained crude prices in excess of $80 per barrel would not be good for the global recovery. Several other commentators have also warned that higher crude prices will potentially curtail the emerging recovery, as higher production costs and energy prices will dampen the fragile economic growth. According to OPEC’s el-Badri, the cartel would consider altering production levels at its December meetings depending on the oil price and the level of the ‘floating surplus’.

Its appears as though the crude oil market is finely poised between a growing investment asset for both private and institutional investors and the potential of it becoming a burden for the fledgling economic recovery.


All oil and gas stocks were in the black, responding to the positive movements in the stock markets and the increase in oil prices. BG Group (LSE: BG) was in the lead with a 1.6% gain, while Cairn Energy (LSE: CNE) was up 1%. Shell (LSE: RDSB) also gained 1%, while fellow supermajor BP (LSE: BP) tacked on less than 1%, as did Tullow Oil (LSE: TLW) and Petrofac (LSE: PFC).


Midcaps also did well as Dana Petroleum (LSE: DNX) rose 1%, while Dragon Oil (LSE: DGO) and Heritage Oil (LSE: HOIL) both posted small gains.


Juniors didn’t show much movement this morning. Peru, Colombia and Cuba operating oil and gas explorer and producer Gold Oil (LSE: GOO) led the sector with an 8% gain. North Sea explorers Xcite Energy (AIM & TSX: XEL) followed with a 5% advance, while Europe focused oil and gas developer Ascent Resources (AIM: AST) added 3%.


Energy investor Xtract Energy PLC (AIM: XTR) did well, adding 8% in the afternoon.

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