MARKET WATCH: Oil prices back to levels before SPR release news

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 30 -- Crude oil prices continued to climb June 29 with crude escalating 2% in New York, back to levels prior to the International Energy Agency’s announcement of the pending release of 60 million bbl from members’ emergency petroleum reserves.

Just a week ago, IEA announced it would release the crude and product from emergency reserves in an effort to drive down oil prices. Now the “flat price is already back to its pre-IEA level, and Brent has regained most of its premium to West Texas Intermediate,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “From the price action, we have to conclude either that the supply and demand is so tight that 30 million bbl of sweet oil release from the US Strategic Petroleum Reserves does not matter or that the futures markets are disconnecting from the reality of the physical markets,” he said.

“Brent futures regaining most of its premium to WTI remains for us a very intriguing phenomenon when the Brent 2011 backwardation has disappeared, the Light Louisiana Sweet (LLS) premium to WTI is eroding, and the physical premiums for Forties or West African crude oil are falling to the pre-Libya levels. We find it difficult to currently attach anything to the relative strength of Brent futures vs. WTI futures,” Jakob said.

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, “After an initial fall, prices have rallied. The back of the curve has risen, given that the release is primarily a way of borrowing oil from the future into the present because the strategic reserves will ultimately be replaced. Overall, we see the IEA action as being well motivated, but a shot in the dark; in our view, the impact on oil politics and on market perceptions raises the danger of some significant distortions.”

Cumulative loss of Libyan production now stands at 182 million bbl—“primarily diesel-rich light crude bound for Europe,” Horsnell reported, adding, “The first IEA release is one third of that amount, split across regions and between crude and products.”

A larger-than-expected drop in the weekly report of US petroleum inventories also helped boost crude prices, said analysts in the Houston office of Raymond James & Associates Inc. “Progress towards staving off a European debt default [in Greece] lifted the broader market (with the Dow Jones Industrial Average and the Standard & Poor's 500 Index up 1%). Energy stocks outperformed, given the strength in crude,” they said. “Meanwhile, natural gas fell 1% after the Energy Information Administration reported strong monthly production data for April and May and forecasts for current hot weather to moderate next week.” Natural gas was lower while crude and the broader market were roughly flat in early trading June 30.

US inventories
EIA reported commercial inventories of benchmark US crude (excluding US SPR stocks) fell 4.4 million bbl to 359.5 million bbl in the week ended June 24, well past the Wall Street consensus for a 1.5 million bbl draw. Gasoline stocks dropped 1.4 million bbl to 213.2 million bbl in the same period, against market expectations of an 800,000 bbl increase. Finished gasoline stocks decreased while blending components increased. Distillate fuel inventories rose 300,000 bbl to 142.3 million bbl, short of the 1.1 million bbl build analysts anticipated (OGJ Online, June 29, 2011).

On June 30, EIA reported the injection of 78 bcf of natural gas into US underground storage during the week ended June 24, below Wall Street’s consensus for an input of 81 bcf. It increased working gas in storage to 2.4 tcf, down 243 bcf from the storage level in the comparable week last year and 63 bcf below the 5-year average.

“Refining stocks saw a nice boost from the draw in gasoline with a smaller than expected build in distillates. Notably, Cushing, Okla., inventories fell by 500,000 bbl and are nearly on par with levels from last year,” Raymond James analysts said. On the demand side, distillate demand rebounded from its recent slide (up 3.9% for the week) but remains down nearly 8% from a year ago. Total petroleum demand and gasoline demand fell from a week ago. “While gasoline demand is up slightly year-over-year, total petroleum demand is down 3% year-over-year,” they said.

EIA revised down total US petroleum demand in April by 437,000 b/d, with most of the revisions coming from lower demand than first estimated in gasoline (down 304,000 b/d) and distillates (down 189,000 b/d). Demand for petroleum products excluding LPG was down 450,000 b/d in April vs. a year ago (down 2.7%) “and is the lowest demand for a month of April since 1997,” Jakob reported.

For January-April, he said, US demand for petroleum products excluding LPG was unchanged from a year ago, down 232,000 b/d vs. 2009, down 1.2 million b/d vs. 2008, and down 1.7 million b/d vs. 2007. “Gasoline demand was at the lowest level for a month of April since 2002,” said Jakob. “The strong downward revision to gasoline demand is only half of a surprise since the US Highway Administration had shown vehicles miles of travel dropped 2.4% in April vs. a year ago, showing the first drop outside of winter months since 2008. Prices have a verified impact on demand, and [this is] something to keep in mind as flat price is currently trying to rebound towards the April price levels.”

Jacob surmised, “If the US domestic demand is not recovering from the economic crisis levels of early 2009, the US refineries continue to compensate the lack of domestic demand with increased exports. Exports of distillates in April at 873,000 b/d were a match to the record levels set in October of last year. On a distillates yield of 28.1%, US refineries were running 3.1 million b/d of crude oil in April to produce distillates for exports.”

He said, “Given that domestic demand is dead, running too hard for distillate exports would create an imbalance in the domestic gasoline market, but that is offset by an increase in gasoline exports that is also starting to trend higher. US gasoline demand in April is down 450,000 b/d vs. 2007, but US gasoline exports are higher by 360,000 b/d vs. 2007.”

Energy prices
The August contract for benchmark US sweet, light crudes climbed by $1.88 to $94.77/bbl June 29 on the New York Mercantile Exchange. The September contract advanced $1.86 to $95.32/bbl. On the US spot market, WTI at Cushing was up $1.88 to $94.77/bbl.

Heating oil for July delivery increased 9.45¢ to $2.92/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 12.01¢ to $3.01/gal.

The new August front-month contract for natural gas dropped 3.9¢ to $4.32/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., was up 3.6¢ to $4.38/MMbtu.

In London, the August IPE contract for North Sea Brent crude escalated by $3.62 to $112.40/bbl. Gas oil for July jumped by $32.50 to $923.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $2.60 to $106.19 bbl. OPEC also revised its June 27 average basket price down by a penny to $101.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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