MARKET WATCH: Crude oil slips lower, wiping out previous gains

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 28 -- Crude prices slipped lower June 27, wiping out gains from the previous session in the New York market but remaining “just over $90/bbl, a couple dollars shy of its 200-day moving average,” said analysts in the Houston office of Raymond James & Associates Inc.

“With crude in the doghouse, natural gas is looking to gain some momentum after forecasts for hotter weather for the remainder of summer sent prices up 1%,” they said.

The broader equity markets gained 1% after the Federal Reserve System reported that, unlike Portugal, Italy, Ireland, Greece, and Spain (PIIGS), most US banks are poised to pass stress tests, boosting investor confidence.

Meanwhile, the price of North Sea Brent regained some ground after the International Energy Agency confirmed most of the reserve release in Europe will be petroleum products.

SPR bidding
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Of the 60.6 million bbl that will be released, about 39 million bbl will be from sale of strategic stocks (which will increase the commercial stocks) and 22 million bbl from a reduction of holding requirement (which will not increase commercial stocks per se but will result in lower demand that could then result in higher stocks).”

But on a “price-making perspective,” he said, “The only thing that matters is the 30 million bbl of sweet crude oil released in the US for its impact on the Brent market. Looking at Brent regaining a premium to West Texas Intermediate yesterday one would think that the SPR does not matter. But Light Louisiana Sweet (LLS) is diverging from Brent (LLS to WTI is narrowing while Brent to WTI is widening). He noted “more reports” of very large crude carriers (VLCCs) with floating storage options in US waters of the Gulf of Mexico.

“With the front Brent spread moving back to a small backwardation, we calculate the spread-differential premium of Brent to WTI theoretical value at $7.50/bbl and combined with the narrowing of the LLS premium to WTI, we still do not want to be on the long side of Brent vs. WTI,” Jakob advised.

He emphasized, “One thing which is unknown is how much of the 30 million bbl offered by the SPR will actually be bid.” Jakob reiterated, “We do not think that there is enough storage capacity to accommodate the SPR release, unless of course refiners start to keep the incoming VLCCs on floating storage to empty the onshore tanks and make room for the SPR barrels (e.g. some floating storage options are starting to appear in the US gulf).”

Meanwhile, he said, “The bids for the SPR barrels are due by the close of (June 29 business) and the result of the tender will be published within a week.” If the full tender volume is not bid, the remaining volume likely will be retendered.

Jakob cautioned, “If the US refineries do not take the SPR barrels and prices move back up, they are likely to expose themselves to further furry and accusation from Washington as you cannot have on one hand refineries justifying the high prices at the pump due to a loss of crude supplies and on the other hand refineries refusing to take the oil offered to them by the White House. The head of the IEA said it again today: “another stock release is possible if needed”. We will not under-estimate the willingness of the White House to see lower oil prices.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said IEA’s effort won’t alter the underlying supply and demand picture of the oil market much beyond next month when the reserve release will be completed. “The term structure of Brent at the front-end could strengthen again as refineries are enticed back to the market to purchase crude at relatively good margins. While the IEA’s release provides the potential for near-term market volatility, our medium-term and long-term bullish outlook for the oil market remains intact,” he said.

IEA’s European member countries collectively will release 15 million bbl of petroleum products out of the 19.2 million bbl total oil reserve release from Europe. That will include 3.4 million bbl of gasoline, 7.7 million bbl of diesel, 1.2 million bbl of fuel oil, and 400,000 bbl of jet fuel kerosine. “This could put further pressure on the already weak European product market, and weigh on the European refining margin,” Zhang reported.

As a proxy for the oil product supply picture in Europe, the Amsterdam, Rotterdam, and Antwerp (ARA) oil product inventories reported by PJK Services remain at similar high seasonal levels as in 2010 and 2009. “In particular, ARA gas oil stocks stood at a record seasonal high, 476,000 tonnes higher than last year as of last week,” said Zhang. “These high oil product stocks weighed on European refining margins in the first half of June. The recent collapse of crude prices has pushed European refining margins up to their recent highs, from their year-to-date low seen around mid-June.”

However, he said, “The release of oil products and the existing high oil inventories could make this recent strength in European refining margins short-lived. Across the oil barrel, gas oil and diesel are likely to be under the most pressure, while jet and gasoline could get some support from relatively low inventories.”

In other news, US consumer spending stagnated in May, representing the weakest level since June 2010. “This is yet further proof of a softening economic recovery in the US,” said Zhang. “The recent decline in oil prices could provide a much-needed boost to this economy. However, we don't believe that the reserve release will bring about a sustained cooling of the oil market.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped 55¢ to $90.61/bbl June 27 on the New York Mercantile Exchange. The September contract lost 54¢ to $91.17/bbl. On the US spot market, WTI at Cushing, Okla., was down 55¢ to $90.61/bbl.

Heating oil for July delivery increased 1.46¢ to $2.76/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 3.09¢ to $2.81/gal.

The July natural gas contract regained 2.7¢ to $4.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., bumped up 6.8¢ to $4.28/MMbtu.

In London, the August IPE contract for North Sea Brent crude was up 87¢ to $105.99/bbl. Gas oil for July lost $1 to $873.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $1.35 to $101.56/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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