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.

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