MARKET WATCH: Energy prices tumble; Brent-WTI spread at 3-month low

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 16 -- Energy prices fell sharply June 15 with the August contract for North Sea Brent dropping more than $6/bbl, wiping out “all the gains of the last 15 trading days” and closing its price spread vs. West Texas Intermediate to “the weakest level” since March, said Olivier Jakob at Petromatrix, Zug, Switzerland.

In Houston, analysts at Raymond James & Associates Inc. said the European debt crisis and continued worries of a weakening US economy contributed to the drop in WTI prices. “The same factors drove weakness in the broader market,” they said, with energy stocks underperforming. “Rounding things out, natural gas closed the day flat, and is roughly in the same position this morning,” said Raymond James analysts.

The sale-off in oil markets started with a correction in the Brent-WTI spread. By the close of trading, Jakob said, the Brent premium to WTI for August was down by $1.74 to $17.75/bbl, with the WTI contract losing more than $4/bbl in the New York market. “The correction was also fueled by the sharp fall in the euro,” he reported.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported the calendar spread between Brent’s August and December contracts in London dropped to $1.06/bbl. “The price fall came after a consistent decline in refinery margins since the beginning of May,” he said. “The simple hydroskimming refineries in northwest Europe have seen their margins in deep negative territory. Many of the more complex cracking refineries in the region have seen their margins diminished over the past 6 weeks. Because refineries are price-takers, when they face negative refining margins, they have to reduce their crude run rates to minimize losses. Consequently, we’ve seen sluggish demand for crude in the European region over the past few weeks.”

Zhang indicated, “Another signal that demand should move lower lies in the premium for high quality West Africa (WAF) crude over Brent, which has been declining despite the recent force majeure over Bonny Light cargoes declared by Royal Dutch Shell PLC. The premium of Bonny Light over Brent has fallen from $3.92/bbl at the beginning of April to the latest level of $2.22/bbl.”

Meanwhile, more crude cargoes have been diverted to Europe, exacerbating the demand weakness for physical crude on that continent, “since the US offers an unattractive destination following the further widening in the WTI-Brent spread” said Zhang. “Unlike the previous occasion in mid-February when the WTI-Brent spread hit the $20/bbl level, domestic US waterborne crude, such as Light Louisiana Sweet (LLS) crude failed to catch up with Brent. Consequently, many WAF cargoes are uncompetitive for US refineries and are diverted to Europe instead, which further weighs on the European market.”

He foresees continued near-term weakness in the oil market driven by sluggish demand for oil products. “Coming into the third quarter, demand is expected to be strengthening by a seasonal pick-up, which should support the oil market in the medium term together with tightening crude supply,” Zhang said.

US inventories
The Brent term structure dropped significantly June 15, “which was arguably overdue, as we have reiterated many times, due to the weakness of the physical crude market in Europe and a broad-based decline of West Africa crude differentials,” said Zhang. “In comparison to Brent, the WTI structure strengthened after the US Department of Energy reported a sizable crude inventory draw at Cushing, Okla.”

DOE’s Energy Information Administration said commercial inventories of US benchmark crudes dropped 3.4 million bbl to 365.6 million bbl in the week ended June 10, exceeding the Wall Street consensus for a 1.8 million bbl loss. Gasoline stocks increased 600,000 bbl to 215.1 million bbl during the same period, with gains in both finished gasoline and blending components. That was short of the expected build of 1.1 million bbl. Distillate fuel inventories decreased by 100,000 bbl to 140.8 million bbl. Traders’ outlook was for a 1 million bbl increase (OGJ Online, June 15, 2011).

On June 16, EIA reported the injection of 69 bcf of natural gas in to US underground storage in the week ended June 10, below the Wall Street consensus for a 71 bcf input. That brought working gas in storage to roughly 2.3 tcf. That’s 275 bcf less than in the comparable period last year and 76 bcf below the 5-year average.

“Crude inventories at Cushing fell by 1.1 million bbl, which saw the contango in WTI flatten at the front end of the curve,” Zhang noted. “Crude inventories show a sizable draw, which we believe is due to lower imports as the US offers an unattractive destination for crude cargoes based on the current pricing structure.”

Meanwhile, reformulated blend stock for oxygenate blending (RBOB) and heating oil “fell by a similar percentage to WTI, which should help to support margins for those refineries who buy crude on a Brent basis,” he said. “On a running 4-week average basis, gasoline demand grew slightly while distillate demand remained broadly flat week-to-week.”

Nevertheless, Jakob said, “The weekly statistics did not matter much yesterday. Total petroleum stocks were flat and stocks of crude plus clean petroleum products were down 1.2 million bbl during the week (they are down 20 million bbl vs. 2010 but up 9 million bbl vs. 2009).”

He noted refinery utilization was down on the East and Gulf coasts but higher in the Midwest. As a result, stocks of crude on the Gulf Coast “are not being reduced and are at levels comparable to 2009 or 2010,” said Jakob. “Stocks of gasoline had a small 500,000 bbl build and are at comfortable levels compared to recent years.”

Jakob said, “Overall the [inventory] statistics were not enough of a game changer compared to the volatility seen in the dollar index. Compared to total implied demand, the data suggests that refinery runs should be reduced or contribute to greater stock build of products.”

Energy prices
The July contract for benchmark US sweet, light crudes fell $4.56 to $94.01/bbl June 15 on the New York Mercantile Exchange. The August contract dropped $4.60 to $95.26/bbl. On the US spot market, WTI at Cushing matched the front-month crude futures price, down $4.56 to $94.01/bbl.

Heating oil for July delivery declined 14.1¢ to $2.98/gal on NYMEX. RBOB for the same month decreased 14.11¢ to $2.92/gal.

The July natural gas contract dipped by 0.4¢ but closed virtually unchanged at a rounded $4.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to decline, down 5.4¢ to $4.53/MMbtu.

In London, the expiring July IPE contract for North Sea Brent crude dropped $3.06 to $117.10/bbl. However, Zhang said, “The drop was much more pronounced in the more actively traded August Brent contract, which plunged by $6.34/bbl” to $113.01/bbl. Gas oil for July lost $13.50 to $978.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes retreated 97¢ to $112.62/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

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

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

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


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

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