MARKET WATCH: Debt and demand worries undercut energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 28 -- Energy prices generally fell July 27, wiping out small gains from the previous session, with crude oil dropping 2.2% in the New York market on continued concern over the debt limit stalemate and a bearish government report on US oil inventories.

“The markets were slammed yesterday,” said analysts in the Houston office of Raymond James & Associates Inc. The Standard & Poor’s 500 index fell more than 2%. Natural gas dropped 1.2%, pressured by milder weather. Both oil and gas prices were relatively flat in early trading July 28.

Leon Westgate at Standard New York Securities Inc., the Standard Bank Group, reported, “Crude oil has continued to track the dollar in recent days, with both West Texas Intermediate and Brent coming under pressure yesterday and again this morning.”

Olivier Jakob at Petromatrix in Zug, Switzerland, ticked off a list of economic problems including lack of agreement on US debt and release of the Federal Reserve System’s latest Current Economic Conditions Report (the “Beige Book”) of anecdotal information on economic conditions. The latest report shows “the soft patch is not coming to an end, while US durable goods orders for June came out much worse than expected and does not bode well for the second quarter gross domestic product numbers” to be published July 29, he said. “Investors are starting to take some risk off the table as the deadline on the US debt extension comes closer; the S&P 500 lost a significant 2.02% yesterday and this while the dollar index was regaining the losses of the previous day.”

Jakob warned, “Don’t count on Europe to offset any disappointment in the US economic recovery. Cyprus is now next on the list of countries that are likely to require a bail-out. Not a big economy but another of the European dominoes that will need to come on the books of the French-German union. Meanwhile, the [United Nations’] International Monetary Fund is warning France about its budget deficit, and French unemployment jumped in June much more than expected, increasing by 1.3% from May…which already had seen an increase. Equities and commodities are close to record highs, pricing the mother-of-all-economic-recoveries but the macroeconomic data points are still very fragile and the investment appetite poor.”

Tropical storm
Meanwhile, Tropical Storm Don is “quickly rising in the ranks” of potential market concerns, said Raymond James analysts. Don, the fourth named storm of the current Atlantic hurricane season, formed July 27 off Mexico’s Yucatan Peninsula. Offshore operators are already evacuating nonessential crew from rigs and platforms in the US sector of the gulf, but production is not shut in yet. “Gulf Coast refiners are likely keeping their eyes on the storm as well. We note that natural gas prices have yet to blink, while crude is taking the opposite approach (dollar-driven),” Raymond James reported.

“As of now the calculated path [of the storm] should be more of a concern for refining assets than for oil-producing platforms,” Jakob said.

AccuWeather.com earlier warned Gulf Coast motorists, “If you want to be safe, fill up now,” alluding to a possible spike in retail gasoline prices rather than any need yet for evacuation. “As evidenced in the past, temporary spikes in [gasoline] prices do coincide with tropical systems moving through the Gulf of Mexico,” weather analysts said.

Don is expected to make landfall over Texas late July 29. “It will probably be a tropical storm, but it is very possible the system could develop into a minimal hurricane,” said AccuWeather.com Tropical Expert Dan Kottlowski. Its early path would take it south of Corpus Christi, and only a few offshore facilities would be affected. However, Kottlowski expressed concern the storm could track farther north along the Texas coast where there is a higher concentration of refineries and offshore platforms.

US inventories
The Energy Information Administration earlier said commercial US crude inventories increased 2.3 million bbl to 354 million bbl in the week ended July 22, the reverse of the Wall Street consensus for a 2 million bbl draw. Gasoline stocks rose 1 million bbl to 213.5 million bbl, outstripping analysts’ expectations of a 400,000 bbl build. Both finished gasoline and blending components increased during the week. Distillate fuel inventories jumped by 3.4 million bbl to 151.8 million bbl in that period, more than double market projections of a 1.6 million bbl gain (OGJ Online, July 27, 2011).

EIA reported July 28 the injection of 43 bcf of natural gas into US underground storage last week, above analysts’ consensus for 36 bcf input. That brought working gas in storage to 2.71 tcf, down 201 bcf from the comparable period last year and 65 bcf below the 5-year average.

Raymond James analysts attributed the build of crude inventories to the release of 2.3 million bbl from the US Strategic Petroleum Reserve earlier in the week. “Demand also posted bearish numbers as total petroleum demand fell 2.3% sequentially and is down 2.2% year-over-year on a 4-week moving average basis,” they said. A drop in the New York market’s 3-2-1 crack spread coincided with a decline in refinery utilization to 88.3% last week from its high of 90.3% the previous week. “While macro factors (debt ceiling and stronger dollar) continued to be in the driver's seat for crude prices yesterday, the large build in inventories certainly did not help as crude ended the day down,” the analysts said.

The EIA report showed “a total stock build of 11.4 million bbl, which is not a small amount (1.6 million b/d), of which only 2.3 million bbl was coming from SPR,” Jakob observed. “So far in July and excluding the 2.3 million bbl from SPR, the US has built 19.5 million bbl or 900,000 b/d. This has to be put in the context of the International Energy Agency (IEA) in Paris that was calling for a world stock draw of 1.3 million b/d in the third quarter. If the US is building at a rate of 900,000 b/d, then it would mean that the rest of the world is drawing at a rate of 2.2 million b/d or that the IEA is wrong in its estimate of supply and demand in the third quarter. We think it is the later rather than the former.”

Jakob also pointed out, “Total implied oil demand on the 4-week average is down 3.24% vs. last year, and as importantly it is trending down. The total US implied oil demand on the 4-week average is at par to the levels of 2009…. For the week, total US oil demand is down 1.2 million b/d vs. a year ago and 300,000 b/d lower than in 2009. For the same week, US oil demand is at the lowest level since 1998.”

He reported, “Implied demand for clean petroleum products (CPP) is down on the 4-week average by 3% vs. last year. It is outside of the norm to see a declining trend at this stage of the season.” He said total stocks of crude and CPP were up 6.7 million bbl during the week and at par to 2009 levels “before accounting for the SPR barrels.”

There were 4.5 million bbl of SPR crude scheduled for release July 17-23. The cut-off date for the latest EIA report was July 22 and showed only 2.2 million bbl of transfers. “With 2.3 million bbl still to be transferred on July 23 and 4.2 million bbl scheduled July 24-31, there should be a large layer of SPR crude oil showing up in the next report,” Jakob surmised.

He said low refinery utilization rates on the US Gulf were not helping make room for SPR barrels to be released in the next few weeks, but refinery runs remain at high levels in the Midwest to capitalize on the WTI margins, and this is helping to reduce some of the crude oil stocks in the Midwest except in Cushing, Okla.

Meanwhile, Jakob said, “The price of regular gasoline at the pump is back to flirting with $4/gal on the East Coast, hence the drop in sales vs. last year while unemployment is still historically very high should not be a great surprise. The gasoline stocks are in the range of previous years. Gasoline stocks are lower than a year ago, but given that implied demand for gasoline is 3.3% lower than a year ago, the days-of-cover are at par to the levels of last year and at the highest levels since 2002.”

Jakob reported, “Overall, in the US, implied demand for petroleum products is turning to the worse, which cannot be a great surprise since both prices at the pump and unemployment are not coming down. Refineries are still running but due to the slow demand the product production is going to stocks. The slowdown of demand comes at a time when US refiners are receiving large layers of SPR crude oil barrels, and this should translate into a continued stock build (be it in crude oil or in products) while a lot of hype had been created about ‘huge stock draws to come in the third quarter.’ Oil prices do not really need to move higher than current levels to cap demand. Despite the builds in the US Gulf and the SPR barrels that still need to be delivered, the Brent premium to WTI is widening further and the Light Louisiana Sweet premium to WTI increasing to what we think are record high levels.”

Energy prices
The September contract for benchmark US sweet, light crudes fell $2.19 to $97.40/bbl July 27 on the New York Mercantile Exchange. The October contract dropped $2.17 to $97.84/bbl. On the US spot market, WTI at Cushing was down $2.19 to $97.40/bbl.

Heating oil for August delivery declined 3.08¢ to $3.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 1.13¢ to $3.14/gal.

The August contract for natural gas was unchanged at $4.37/MMbtu on NYMEX, but the September contract was down 1.3¢ to $4.32/MMbtu. On the US spot market, gas at Henry Hub, La., increased 2.2¢ to $4.45/MMbtu.

In London, the September IPE contract for North Sea Brent dropped 85¢ to $117.43/bbl. Gas oil for August lost $4 to 974.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 24¢ to $113.41/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