MARKET WATCH: IEA releasing oil in hopes of pushing down prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 23 -- Oil prices dropped in early trading June 23 after Paris-based International Energy Agency said its 28 member countries agreed to release 60 million bbl of crude from strategic reserves at the rate of 2 million b/d for 30 days “in the coming month.” The US will provide 30 million bbl of this crude from its Strategic Petroleum Reserve (OGJ Online, June 23, 2011).

IEA officials said the release is in response to disruption of crude supplies from Libya as a result of the revolution in that country.

However, Saudi Arabia earlier said it would increase its oil production to 10 million b/d to help make up any market shortfall (OGJ Online, June 20, 2011). And Goldman Sachs Group Inc. said this week Libyan rebels could increase their country’s oil exports by as much as 355,000 b/d from areas they hold (OGJ Online, June 23, 2011).

IEA said its action “will contribute to well-supplied markets and to ensuring a soft landing for the world economy.” It will be only the third time in the IEA’s history that member countries release stocks intended for emergency backup if normal supplies are disrupted. The reserves are not supposed to be used to manipulate crude prices.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Given that there is no physical disruption [of crude supplies] in the US, this should put pressure on the US Gulf Coast crude oil markets and therefore by default on North Sea Brent.” The release of strategic stocks “should have more impact on Brent than on West Texas Intermediate futures,” particularly on the price premium of Brent over WTI, he said.

Moreover, oil consumption among member countries of the Organization for Economic Cooperation and Development is declining. “The IEA members need fewer stocks to cover their stock-to-demand ratios and at current prices it will be a budgetary help that a few countries will not refuse. Because of the declining demand and lower needs for stock-to-demand ratio, such a release would not necessarily require a replenishment of stocks at a later date (i.e. it would be a net sale),” Jakob reiterated (OGJ Online, June 10, 2011).

Meanwhile, a bullish report of diminished US commercial crude and gasoline inventories (not including the SPR) lifted the new front-month futures contract 1% June 22 in the New York market, despite a baleful prediction by Federal Reserve System Chairman Ben Bernanke of a disappointingly weak economic recovery through 2012.

“Oil initially rose above $95/bbl on bullish inventory data driven by an unexpected draw in gasoline stocks. Cushing, Okla., inventories rose for the first time in 4 weeks, contributing to the relative underperformance of [WTI] vs. Brent. Meanwhile, the demand picture remains lackluster. Total petroleum demand rose moderately week-over-week but remains down 3% year-over-year (4-week average). Gasoline demand is now up 1% year-over-year, while distillate demand has continued its recent slide and is now down 7% year-over-year. Crude eventually settled above its early gains after rallying from a midday pullback driven by the cautious Fed commentary,” said analysts in the Houston office of Raymond James & Associates Inc.

US inventories
The Energy Information Administration earlier reported 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. That surpassed market expectations of a 600,000 bbl rise (OGJ Online, June 22, 2011).

On June 23, EIA officials said there was an injection of 98 bcf of natural gas into US underground storage in the week ended June 17, well above the Wall Street consensus for an increase of 91 bcf. That brought working gas in storage to 2.35 tcf, which is 258 bcf below year-ago level and 64 bcf under the 5-year average.

“WTI’s structure weakened as Cushing inventories grew again last week,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products failed to catch up with the rally in crude, which pushed refinery margins to weaken further. Weakness is particularly pronounced in middle distillates; European gas oil cracks lost around 70¢/bbl. In contrast, gasoline cracks strengthen slightly.”

Zhang noted, “Crude inventories at Cushing grew by 300,000 bbl, which saw the contango in WTI steepened again. Total US refinery utilization rates jumped by 3.1% for the week.” That pushed the total gross refinery input to 15.8 million b/d—“the highest level since August last year,” he said.

During a 2-day meeting that ended June 22, the Federal Reserve System kept its policy rate at the record low 0.25%. The Federal Open Market Committee, the Fed’s policymaking arm, acknowledged the US economy is growing at a slower pace and the job market is weaker than was expected at their last meeting in April, despite billions of dollars distributed in an effort to stimulate the economy. Fed officials gave no indication of any additional major monetary policy moves, such a new round of quantitative easing.

Meanwhile, Zhang said, “Weak product markets ultimately reflect a sluggish demand picture, particularly in middle distillates. We expect to see a more sustained recovery in oil prices when oil products take the lead in a rally. That said, geopolitical risks in the Middle East region remain heated, particularly in Syria and Bahrain, which pose major upside risks to oil prices.”

Energy prices
The new front-month August contract for benchmark US light, sweet crudes gained $1.24 to $95.41/bbl on the New York Mercantile Exchange. The September contract rose $1.32 to $95.92/bbl. On the US spot market, WTI at Cushing jumped by $2.01 to $95.41/bbl as it adjusted to the new front-month contract’s price.

Heating oil for July delivery increased 6.49¢ to $2.95/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 9.07¢ to $2.97/gal.

The July natural gas contract lost 7.1¢—the exact amount it gained the day before when it ended seven consecutive sessions of losses—to $4.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 4¢ to $4.42/MMbtu.

In London, the August IPE contract for North Sea Brent escalated by $3.26 to $114.21/bbl. Gas oil for July gained $5.25 to $926.50/tonne following a long losing streak.

The Organization of Petroleum Exporting Countries' office in Vienna was closed June 23, and no price update was available for its basket of 12 reference crudes

Contact Sam Fletcher at samf@ogjonline.com.

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