Oil Rose Too Fast While Demand Dropped

Jim Brown
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Crude prices rose to $87 last week after the U.S. jobs report showed a gain in March. However, demand is not matching the jobs gain. Crude oil inventories rose to a 52-week high and the four-week moving average of crude oil demand fell for the third consecutive week to just over 19 million barrels per day.

The rally in crude was due in most part to quarter end retirement funds flowing into commodity accounts. Now that this quarterly phenomenon has passed the fundamentals should return. Gasoline demand did rise +2% over the same period in 2009 but overall petroleum demand including jet fuel and diesel has fallen sharply.

At the gas pump the price of gasoline on a national average rose to $2.862 according to AAA and the Oil Price Information Service. That is a 9.4 cent gain over March and 81.1 cents higher than the same period in 2009.

Refineries boosted production last week in the race to produce more gasoline while the crack spreads are still in the $14 range. Once additional refineries complete their spring maintenance cycle and start producing summer gasoline blends those crack spreads will decline. Gasoline futures for May delivery fell to $2.2893 and the lowest level since March 30th.

Over the weekend China joined the U.S. and the other nations on the U.N. Security Council in talks over additional sanctions over Iran. China and Russia have balked at additional sanctions but both have changed their positions over the last week to a more open stance. Russia said it was disappointed in Iran. The U.N. countries have presented Iran with dozens of options and Iran has dismissed them all. Russia said Iran needed to accept an option quickly to avoid new sanctions. China, which has always pressed for a diplomatic solution, also joined the talks saying Iran apparently did not want a diplomatic solution.

If the U.N. can suddenly find some common ground over sanctions the worry over an Iran security premium in oil will quickly return. That premium had evaporated over the last month but Iran is likely to rattle its sabers again now that Russia and China are on the U.N. side.

Supporting oil prices is the sharp drop in the dollar now that the EU has decided to offer Greece a 30 billion euro loan. This bailout has sent the S&P futures and the price of oil sharply higher and knocked the dollar to a new two-week low. The inverse relationship between the dollar and the price of oil is sure to be tested this week with the May futures contract expiring on Tuesday the 20th. With only 7 days left to trade there is still a large open interest from the commodity fund cash infusion.

Also helping the fundamentals for oil was news this weekend that China increased March crude imports by 29% over March 2009 levels. Crude imports reached 4.98 mbpd. Net imports reached or 20.8 million metric tons and second only to December's record of 20.9 MMT. China National Petroleum Corp estimates the resurgent economy would push imports to record highs for 2010.

China also said it would likely refine a record amount of crude in April because of high fuel demand during the spring farming season. China subsidizes fuel costs and demand will be influenced by the final price to the consumer. Imports of gasoline and diesel reached 3.22 MMT in March.

Saudi Arabia announced a strategic shift towards exploration and away from drilling and producing existing reserves. Aramco reported it plans to drill 300 development wells and 48 exploration wells in 2010. The number of working rigs would remain 96 of which 17 would be used for exploration. However, the number of active rigs has declined for the last two years. In 2009 Aramco used 104 rigs, down from 130 rigs in 2008. Aramco finished its biggest capacity boost in history in 2009 as a five-year development program was completed.

Saudi Arabia is fast tracking some new electric plants ahead of summer electricity shortages. Saudi is planning on using oil as the fuel because of a natural gas shortage. This is another reason the slight shift to more exploration wells with an emphasis on gas.

BP said Friday it was going to cut output on its Thunder Horse platform by half in order to do some maintenance. Thunder Horse produces 250,000 bpd of oil and 200 mmcf of gas. The shutdown is expected to take several weeks and will cut their annual production by 10,000 bpd. The maintenance involves upgrades th undersea manifolds.

The American Gas Association (AGA) said known U.S. natural gas reserves rose for the 11th consecutive year in 2009 to end the year at 250 TCF. That is the highest level in 35 years. The AGA expects reserves to hold around that level as new finds are offset by existing production. The AGA identified BP as the largest U.S. producer with less than 5% of the national total. The AGA said thousands of other large, midsized and small producers provide the bulk of domestic gas to local distribution networks.

India's Reliance Industries Ltd formed a $1.7 billion joint venture with Atlas Energy Inc (ATLS) to drill and produce gas from the Marcellus Shale in Pennsylvania. This was announced on Friday. Reliance will gain a 40% undivided interest in 300,000 acres, 120,000 net to Reliance. Atlas will retain a 60% undivided interest. As part of the deal Reliance will fund all its own drilling and development PLUS 75% of Atlas drilling and completion costs. This is a killer deal for Atlas because the company gets cash plus $1.36 billion in drilling cost compensation. Atlas also gave Reliance a right to purchase all or part of the 280,000 Appalachian acres it owns should Atlas decide to sell any of the acres.

Jim Brown

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