Crude market volatile in early May

Sam Fletcher
OGJ Senior Writer

Crude prices plunged during five trading sessions through May 6 in the biggest single-week loss on the New York Mercantile Exchange since 2008. That included a 9% drop on May 5 to less than $100/bbl on NYMEX for the first time since March as the dollar escalated nearly 2% over the euro after the European Central Bank (ECB) indicated it would not raise lending rates.

Front-month contracts for West Texas Intermediate and North Sea Brent crude registered net losses of $13.80/bbl and $16.76/bbl, respectively, over the week. The sell-off sacrificed much of the previous price gains from political unrest in the Middle East and North Africa. The euro lost 3.3% during the week, which weighed on the oil prices.

The following week, however, energy prices rebounded with crude climbing 5.5% to close once more above $100/bbl on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) was the best performer in the oil complex, settling at the highest price above the June heating oil contract since May 2009.

Oil prices continued climbing May 10 with the front-month crude contract up 1.3% in the New York market on fears Mississippi River flooding will further disrupt fuel supplies.

“In contrast to a strong recovery in crude, gas oil cracks were hit hard May 10, reaching their lowest level since August 2010,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

But then energy prices tumbled again May 11 with the front-month gasoline futures contract plunging 7.6% and crude down 6% on NYMEX following a strong rally by the US dollar and larger-than-expected builds in US oil inventories.

Trading on NYMEX the New York Mercantile Exchange was temporarily halted at one point as the June reformulated blend stock for oxygenate blending (RBOB) future contract reached its 25¢/gal limit, before trading was resumed with widened limits. It closed at $3.12/gal, down 25.68¢ for the day following its 10.13¢/gal gain in the previous session. “A 1% week-over-week decline in gasoline demand added insult to injury, spurring fresh concerns of demand destruction,” said analysts in the Houston office of Raymond James & Associates Inc.

Oil inventories up
The Energy Information Administration reported commercial US crude inventories gained 3.8 million bbl to 370.3 million bbl in the week ended May 6, more than double the Wall Street consensus for a 1.5 million bbl increase. Crude supplies are above average for this time of year. Gasoline stocks increased 1.3 million bbl to 205.8 million bbl last week, while the market was expecting an 800,000 bbl decrease. Distillate fuel inventories dropped 800,000 bbl to 144.3 million bbl vs. traders’ expectations it would remain flat (OGJ Online, May 11, 2011).

On May 12, energy prices changed direction again with crude making a small gain, up 0.7%, after recovering from a sell-off earlier in that session when China again increased its bank reserve ratio. Oil prices continued climbing to close May 13 to close at $99.65/bbl.

“The oil market is in a period of severe volatility, with a range of fears driving softer longs [investors] out of the market,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

He said, “However, the underlying state of the market remains very constructive, in our view, with the plunge in the Organization of Petroleum Exporting Countries’ output creating a deficit at the margin of the market in the current quarter. The scale of the deficit is such that we see concerns about demand destruction as being overblown, particularly given the continuing surge in demand [outside] the Organization for Economic Cooperation and Development.”

Chinese oil demand continues to run well ahead of consensus forecasts, at the third highest level on record in April. Year-to-date, Chinese oil demand is running 946,000 b/d higher, said Horsnell.

“On the supply side, non-OPEC growth has hit some severe headwinds so far this year, with a very sharp slowdown in the rate of year-over-year growth,” he noted.

(Online May 16, 2011; author’s e-mail: samf@ogjonline.com)

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