MARKET WATCH: Crude oil price drops to 3-month low

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 5 -- The strengthening US dollar caused crude prices to fall 4% May 4 in the New York futures market—its biggest drop in 3 months—among market fears that Europe has spent so much shoring up Greece’s troubled economy that it may not be able to bail out the larger economies of Spain and Portugal, which are also in dire condition.

“Fresh concerns over the $146 billion Greek bailout (and whether European sovereign debt is spiraling out of control) coupled with a Chinese manufacturing index showing that country's attempts to cool its economy are working all too well to send nearly everything into the red,” said analysts in the Houston office of Raymond James & Associates Inc. The Dow Jones Industrial Average and the Standard and Poor's 500 index of large company stocks were each down 2%, while the Oil Service Index was down more than 3%.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Europe is burning on all sides. In the north, the [Iceland volcano] ashes are back and forcing some airport closure in Ireland and Scotland. The situation is clearly not as bad as earlier in April but will nonetheless require a constant monitoring. In the south, European politicians are trying to convince the [public] that the smoke coming out of Greece, Spain, and Portugal is not the result of any fire, but the markets are voting with their feet and the euro is trending towards the lows of 2009.”

Jakob said, “West Texas Intermediate has moved from trading a dollar correlation in 2009 to trading a S&P 500 correlation in 2010. If we were trading the same dollar correlation as in 2009, then WTI would be at $55/bbl.”

US inventories
The Energy Information Administration said May 5 commercial US inventories of crude continued to increase, up 2.8 million bbl to 360.6 million bbl in the week ended Apr. 30, exceeding the Wall Street consensus for a 1 million bbl gain. Gasoline stocks rose by 1.2 million bbl—the same amount as the loss reported for the week ended Apr. 27—to 224.9 million bbl. Analysts were expecting a 1 million bbl increase. Distillate fuel inventories were up 600,000 bbl to 152.4 million bbl, far short of a consensus for a 2 million bbl hike. The size of each group’s inventories remains above average for this time of year, EIA reported.

Earlier the American Petroleum Institute reported even bigger increases in US inventories, with crude up 2.95 million bbl to 363.9 million bbl. Gasoline gained 1.5 million bbl to 220.9 million bbl. Distillate stocks, meanwhile, rose 1.4 million bbl to 146.9 million bbl, API said.

The import of crude into the US increased 270,000 b/d to 10 million b/d in the latest week, EIA reported. In the 4 weeks through Apr. 30, imports averaged 9.5 million b/d, up by 255,000 b/d from the comparable period in 2009.

The input of crude into US refineries increased 190,000 b/d to 15.1 million b/d in the latest week with units operating at 89.6% of capacity, up from 89% the previous week. Gasoline production declined to 9.1 million b/d in that period, and distillate fuel production decreased slightly to 4.2 million b/d.

Although refinery utilization increased, “production of light products (gasoline plus distillate plus jet fuel) fell 0.5%,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “Imports of gasoline blendstocks (1 million b/d) were at the highest weekly level since February 2009.” He said, “Over the past 4 weeks, demand for light products is 2% ahead of year-ago levels, according to the EIA (vs. 1% last week).”

EIA regional data showed rising refinery utilization rates on the East Coast for the week to 74% from 66%. “Coupled with a high level of imports (1 million b/d of gasoline and blendstocks and 200,000 million b/d of distillate), inventories of both gasoline and distillate increased by large amounts vs. [the previous] week,” Rousseau said.

The Deepwater Horizon oil spill has not yet caused any import restrictions. “The wide contango on West Texas Intermediate will work its way into reduced returns for all the commodity indices and exchange traded funds as they start the monthly rolls at the end of this week,” said Jakob.

The wide contango on WTI and the WTI discount to North Sea Brent has triggered “an offsetting increase in the US Gulf sour crude oil differentials to WTI, with Mars [medium sour blend crude] now inventoried at par to WTI,” Jakob reported. “Hence, if June WTI has lost $3.72/bbl vs. Brent since the start of April, US Gulf crude has been unchanged vs. Brent in the same period.

The latest MasterCard Spending Pulse report on gasoline sales at the pump is “not supportive,” Jakob said. “Sales were flat on the week, but they are 2.3% below the same week a year ago and down 1.1% on the 4-week average. US global retail sales might have been improving lately, but the US consumer is cutting on his driving in order to afford the latest gadget from Apple.”

Energy prices
The June contract for benchmark US light, sweet crudes fell $3.45 to $82.74/bbl May 4 on the New York Mercantile Exchange. The July contract dropped $3.39 to $85.76/bbl. On the US spot market, WTI at Cushing, Okla., was down $3.45 to $82.74/bbl. Heating oil for June delivery declined 8.56¢ to $2.26/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 11.29¢ to $2.32/gal.

The June natural gas contract increased 1.3¢ to $4.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 7.5¢ to $3.98/MMbtu.

In London, the June IPE contract for North Sea Brent crude was down $3.27 to $85.67/bbl. Gas oil for May dropped $19.25 to $724.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 20¢ to $84.16/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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