MARKET WATCH: Gasoline, crude prices tumble over high inventories

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 12 -- Energy prices tumbled May 11 with the front-month gasoline futures contract plunging 7.6% and crude down 6% in the New York market following a strong rally by the US dollar and larger-than-expected builds in US oil inventories.

“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. “Meanwhile, natural gas fell 2% on concerns of high supplies, with mild weather forecasts expected to provide little in the way of demand.” Energy stocks underperformed and dragged down the broader equities market, which ended the day down 1%, they said. Oil and gas prices continued falling in early trading May 12.

“As a reversal to the previous few sessions, reformulated blend stock for oxygenate blending (RBOB) led the slide, and trading on the New York Mercantile Exchange was temporarily halted at one point as the June RBOB future contract reached its 25¢/gal limit, before trading was resumed with widened limits,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. The June RBOB contract closed at $3.12/gal, down 25.68¢ for the day on NYMEX following its 10.13¢/gal gain in the previous session.

The “collapse” in the RBOB price was driven by a sharp increase in gasoline inventories at Petroleum Administration for Defense Districts (PADD) 1 on the East Coast, Zhang said.

US inventories
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).

EIA reported May 12 the injection of 70 bcf of natural gas into US underground storage in the week ended May 6, just short of the Wall Street consensus for input of 71 bcf. That increased working gas in storage above 1.8 tcf. That’s down 249 bcf from last year at this time and 37 bcf below the 5-year average.

Crude inventories at the key storage and delivery point at Cushing, Okla., increased 1.1 million bbl to 41.6 million bbl—“near the record high set 4 weeks ago, which is likely to keep the front-end of West Texas Intermediate structure under pressure,” Zhang said. “Total refinery utilization rate declined by 1.1%, as a run increase in PADD 3 [on the Gulf Coast] appeared to have been offset by a loss of rate in PADD 2 [the Midwest, including Cushing] and PADD 5 [the West Coast].”

He said, “The gasoline inventories at Cushing increased sharply by 3.5 million bbl, reversing a decline of 10 weeks in a row, which prompted a sell-off in RBOB. The increase in gasoline inventories appeared to be a net result of a high yield, high import, and low demand.”

Zhang added, “The dollar strengthened yesterday, with the dollar index climbing almost 1% and the euro declining by 2.2%, which weighed on the oil market. Despite the inventory build this week, total US inventories have declined significantly since the beginning of March, standing 40 million bbl below last year’s seasonal level.”

He said, “The gasoline inventories at PADD 1 are treading along the bottom-end of its 5-year range.” Zhang sees upside risks for both prices and volatility.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Gasoline did deliver some serious bearishness, trading limit down and forcing the crack to plunge by $6/bbl. Volatility is seriously high both in flat price and in the interproduct spreads, and the exchanges are increasing further the margin requirements. The higher volatility also means that the new money coming into oil has to trade in smaller size due to the increase in the value-at-risk. Therefore the large speculators that have accumulated record length in crude and that might want to save whatever profit they have on the books by selling their length will be met by buyers that can only trade on smaller clips due to the increase in the value-at-risk.”

Oil was not the only commodity that took a hit; silver was down 8%, and corn 5%. “Volatility in many commodities is increasing, and we are linking this to upcoming end of QE2 [the second phase of the Federal Reserve System’s quantitative easing program to stimulate the economy],” said Jakob. “Speculative funds have gone heavily on the long side of commodities during the QE2 program and are now trying to assess the trading conditions in a world soon without QE2. Under QE2, the black boxes were given the easy and simple order to ‘buy the dips, it does not matter, the Fed will give us more money to trade tomorrow and next week.’ We think that part of the high volatility currently in the commodity markets is due to the fact that the QE2 liquidity trading theme is starting to erode. After the sell-off of last week, most if not all the primary dealers were quick to announce that this was just a transitory 1-day event and investors should urgently buy the dip. With the price action of yesterday, that recommendation is now going to be even more questioned.”

Jakob warned, “WTI can go much lower than current levels; a first liquidation target would be the pre-Libyan levels at $86/bbl. The large speculators that bought from September to December on the back of QE2 have marked-to-market about $17 billion of profits in the 2010 books, but WTI compared to the start of the year now has a return of 0%. This basically means that hedge funds are now starting to put the QE2 profits at risk, and some liquidation cannot be excluded given that the price action of yesterday is a warning that [May 5 sell-off] was not necessarily transitory.”

Energy prices
The June contract for benchmark US sweet, light crudes fell $5.67 to $98.21/bbl May 11 on NYMEX. The July contract dropped $5.70 to $98.77/bbl. On the US spot market, WTI at Cushing followed the front-month futures contract, down $5.67 to $98.21/bbl. Heating oil for June delivery lost 10.29¢ to $2.90/gal on NYMEX.

The June natural gas contract declined 6.5¢ to $4.18/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1¢ to $4.19/MMbtu.

In London, the June IPE contract for North Sea Brent crude dropped $5.06 to $112.57/bbl. Gas oil for June lost $9 to $932.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes decreased 13¢ to $111.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

A message from Oil & Gas Journal

12/15/2014

An important transition occurred during production of this issue of Unconventional Oil & Gas Report.

MARKET WATCH: Crude oil prices down as US government shutdown lingers

10/16/2013 The front month crude oil contract on the New York market dropped to the lowest level on Oct. 15 since it last settled below $100/bbl on July 2.

MARKET WATCH: Crude oil traded higher amid Washington budget talks

10/15/2013 Crude oil futures prices traded higher on the New York market Oct. 14 as US lawmakers reported progress in ongoing efforts toward reaching an agree...

MARKET WATCH: Oil prices close down at end of volatile week

10/14/2013 The NYMEX November crude contract lost 99¢ on Oct. 11, settling at $102.02/bbl ending a week of volatile trading. The December contract fell 83¢ to...

MARKET WATCH: Oil prices continue falling as Syria risk apparently lessens

09/17/2013 Oil futures prices reached their lowest level in 3 weeks with the Sept. 16 closing while the US and Russia agreed to terms under which Syria is exp...

MARKET WATCH: Oil prices rebound slightly awaiting US decision on Syria

09/04/2013 Oil prices climbed on New York and London markets Sept. 3 in response to comments indicating key US lawmakers will support US President Barack Obam...

MARKET WATCH: Syria crisis puts pressure on some oil markets

08/27/2013 Crude oil prices in world markets edged upwards Aug. 26 on reports that “tolerance of the West for what’s taking place in Syria appears to be comin...

MARKET WATCH: Oil futures rise Aug. 23 on Lebanon violence

08/26/2013 Oil futures prices rose on the New York market Aug. 23, and traders attributed the increase to escalating violence in the Middle East that added to...

MARKET WATCH: Oil, natural gas close up in waffling markets

08/23/2013 The October contract for benchmark US light, sweet crudes on the New York Mercantile Exchange increased $1.18 to $105.03/bbl Aug. 22. The November ...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts



The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST



On Demand

Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST


Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected