MARKET WATCH: Expiring oil contract up slightly; gas breaks losing streak

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 22 -- The price of crude inched up modestly June 21 in the New York market despite support from a weaker dollar and a strong US equities market; however, natural gas rose 2% on forecasts for warmer weather, ending a seven-session losing streak.

“The broader market (and the euro) rose for the fourth straight day as the Standard & Poor’s 500 index gained more than 1% on expectations that Greek Prime Minister George Papandreou would win yesterday evening's confidence vote. As anticipated, Papandreou secured the victory, thereby improving Greece's prospects for receiving additional financial aid,” said analysts in the Houston office of Raymond James & Associates Inc.

“Oil prices continued to struggle yesterday despite optimism across many major equity markets owing to eased concerns over the euro-zone debt crisis,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Rather than trading a correlation to the exogenous inputs, the crude oil complex was capped by flat price pressure coming from Brent, and the European complex was really under the pressure of InterContinental Exchange (ICE) gas oil.” The ICE gas oil crack is “losing steam,” with December 2011-December 2012 contract prices back into a contango structure, he said.

“The pressure on the gas oil crack will also put some additional pressure on the refining margins. The naphtha crack remains very weak, the gasoline crack is weak, and European refineries have been running at minimum rates. If the gas oil crack continues to weaken, then we will move deeper into the risk of more significant run cuts…on both sides of the Atlantic. If this was to happen, it should translate into pressure developing on the Brent time-spreads, with some erosion in the backwardation structure of Brent,” Jakob said.

Zhang said, “The front-end of the Brent structure strengthened, following further delays in delivery of physical North Sea cargoes, while West Texas Intermediate structure weakened as Cushing, Okla., inventories grew again. Gasoline and middle distillate cracks softened further yesterday, which weighed on refining margins in Europe, and in turn, is likely to keep crude prices under pressure.”

As the Brent-WTI spread narrowed, the premium of Light Louisiana Sweet crude over WTI has exceeded the Brent-WTI spread, “which suggests that it has again become more attractive to move crude cargoes over to the US instead of Europe,” said Zhang. “This is likely to relieve the pressure on the European crude market to some extent, and to provide some support to the weakening Brent structure.”

The Brent-WTI arbitrage spread remains volatile. “It does not relate any more to any physical arbitrage flows but relates instead to a financial arbitrage flow focused on the time-structure of the two crude futures contracts,” Jakob said. Based on the time-structure of the two contracts, he said, “The Brent premium to WTI is overvalued by about $6/bbl.”

Meanwhile, the latest economic data continues to show a softening economic recovery in developed countries that would reduce demand for crude.

In other news, Wood Mackenzie Ltd., Edinburgh, reported June 22 that recent events will accelerate “by 2-3 years” the end of the global oversupply of natural gas, leading possibly to higher spot prices than contract prices in both Asia and Europe.

“The global oversupply of gas, which was previously forecast to end in 2015, will now likely end in 2013 and possibly as early as 2012,” predicted Noel Tomnay, WoodMac’s head of global gas operations. “This oversupply is most manifest in Europe, which has become the market of last resort for LNG supply.”

According to WoodMac’s analysis, the end of gas oversupply in Europe will coincide with an increasingly tight Asian market. By that time Europe will be competing with Asia for LNG in a tight global market, “something not seen since 2008,” said the report.

Tomnay said, “Consequently, there is the potential for European spot prices to be equivalent to or even rise above contract prices within the next 2 years.”

US inventories
The Energy Information Administration said June 22 commercial inventories of benchmark US crudes dropped 1.7 million bbl to 363.8 million bbl in the week ended June 17. The Wall Street consensus was for a draw of 1.8 million bbl. Gasoline stocks were down 500,000 bbl to 214.6 million bbl in that same period, with analysts anticipating a 1 million bbl increase. Finished gasoline supplies increased while blending components decreased. Distillate fuel inventories gained 1.2 million bbl to 142 million bbl, said EIA officials, outstripping market expectations of a 600,000 bbl rise.

The American Petroleum Institute earlier reported US oil stocks declined 81,000 bbl to 362.95 million bbl in that week. It said gasoline inventories fell 1.5 million bbl to 211.9 million bbl, with distillate stocks down 541,000 bbl to 143.2 million bbl.

Imports of crude into the US increased by 511,000 b/d to 9.1 million b/d last week, EIA reported. In the 4 weeks ended June 17, crude imports averaged 9 million b/d, down 724,000 b/d from the comparable period a year ago. Gasoline imports last week averaged 867,000 b/d, while imports of distillate fuel imports averaged 122,000 b/d.

EIA said the input of crude into US refineries increased 409,000 b/d to 15.3 million b/d last week, with units operating at 89.2% of capacity. Gasoline production increased to 9.5 million b/d; distillate fuel production was little changed at 4.3 million b/d.

Energy prices
The expiring July contract for benchmark US light, sweet crudes traded at $92.48-94.74/bbl June 21 on the New York Mercantile Exchange before closing at $93.40/bbl, up just 14¢. The August contract advanced 54¢ to $94.17/bbl. On the US spot market, WTI at Cushing continued tracking the front-month futures contract price, up 14¢ to $93.40/bbl.

Heating oil for July delivery fell 4.2¢ to $2.89/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.89¢ to $2.88/gal.

The July natural gas contract gained 7.1¢ to $4.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.8¢ to $4.38/MMbtu.

In London, the August IPE contract for North Sea Brent crude lost 74¢ to $110.95/bbl. Gas oil continued to tumble, with the July contract dropping $11.25 to $921.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 41¢ to $107.82/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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