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Crude price waffles in early July

Sam Fletcher
OGJ Senior Writer

Oil topped $75/bbl July 8 in the New York market on renewed optimism for economic recovery and a larger-than-expected drop in US crude inventories, down 5 million bbl to 358.2 million bbl in the week ended July 2, said the US Energy Information Administration.

Gasoline stocks gained 1.3 million bbl to 219.4 million bbl in the same period. Distillate fuel inventories edged up 300,000 bbl to 159.7 million bbl. The crude reduction included 2 million bbl in the “discounted” Petroleum Administration for Defense District (PADD) 5 on the West Coast, leaving a 3 million bbl decline “in the [four] PADDs that count,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Imports of crude into the US dropped 68,000 b/d to 9.4 million b/d in that week, primarily due to disruption of Mexico’s crude exports by Hurricane Alex, which made landfall July 1 in northern Mexico after missing oil and gas production areas in the Gulf of Mexico. In the 4 weeks through July 2, US crude imports averaged 9.7 million b/d, up 449,000 b/d above the comparable period in 2009.

Jakob said, “Lower crude oil stocks were expected due to the import restrictions linked to Hurricane Alex but such expectations did not materialize as the US Gulf Coast only drew less than 1 million bbl and US Gulf Coast crude oil imports were higher in the week, not lower, as higher imports from Iraq offset lower imports from Mexico.”

Crude oil stocks in Cushing, Okla., were only marginally lower (down 200,000 bbl) but another small draw was expected, he said. Gasoline stocks increased more than 1 million bbl during the reported week “as imports are on the high side and at the highest level in a week since early March of last year,” Jakob said. Distillate stocks increased only a marginally as there was a draw of high-sulfur heating oil that was offset a build in low-sulfur diesel, he reported.

Implied demand
The implied demand in the latest available EIA oil inventories report was close to 1 million b/d higher than a year ago but still below the levels of 2008. “Implied demand for distillates is [up] a strong 16% vs. a year ago on the 4-week average while gasoline is [up] 2%, which is much stronger than the growth estimated by [the latest MasterCard Spending Pulse report] on the basis of sales at the pump,” Jakob said. “The strong implied oil demand is, however, calculated through no stock draw and that continues to say that supply increases are a match to demand increases.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said data relating crude oil prices to Standard & Poor’s 500 index since the start of 2010 suggest that every 50-point change in the index corresponds to a $4/bbl variation in the market price for West Texas Intermediate. A $25/bbl band around a price near $75/bbl is the equivalent of a range in the S&P 500 “of 750 to 1,400 around a 1,075 base, he said.

“This calculation assumes that oil’s relationship to the S&P 500 remains constant (and positively correlated) over this range, and we are not convinced that this is a good assumption,” Sieminski said. “Historically, the S&P and oil move opposite each other (inversely correlated) with oil tending to be driven by its own fundamental supply and demand balance, and ‘too high’ oil prices slowing the economy.”

Instead, the spare production capacity of the Organization of Petroleum Exporting Countries remains “one of the most important fundamentals.” Sieminski reported, “Over the course of 2010 and 2011, there appears to be very little pressure on the oil markets from reduced spare capacity. The main risk, in our view, comes from the fact that spare capacity is overwhelmingly concentrated in Saudi Arabia, and this suggests that the Saudis will have a lot to say about the direction of prices over the next few years regardless of movements in the S&P 500 index.”

Sieminski reported crude and heating oil returns fell 2% and 1.8% respectively to become the worst performing sector of the Deutsche Bank Liquid Commodity Index since the end of last year. “We believe crude oil returns suffered on the back of a weak equity market and disappointing economic indicators most notably in the US and China,” he said. “We believe the main event risk will be the western Atlantic hurricane season. Historically this tends to be more price bullish for natural gas than crude oil.”

(Online July 12, 2010; author’s e-mail: samf@ogjonline.com)


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