MARKET WATCH: Crude oil price slips lower as China raises interest rate

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 7 -- Energy commodity prices were mixed July 6, with crude slipping lower in the New York market after the People's Republic of China announced another increase in the yuan benchmark interest rate as of July 7 ahead of the official June consumer price index (CPI) data release on July 15.

“The broader markets ended flat, as concerns regarding the national debt ceiling caused investors to take pause after last week's rally,” said analysts in the Houston office of Raymond James & Associates Inc. Despite forecasts for warmer-than-normal weather, they said, a resurgence in nuclear utilization dropped natural gas prices by 3%. Lower commodity prices pulled down corporate energy stocks.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil ended broadly flat after recovering from some intraday sell-off on the back of further monetary tightening out of China and uninspiring US Institute for Supply Management (ISM) nonmanufacturing data.” He said, “The term structure for West Texas Intermediate strengthened in anticipation of further crude stock draws in the US. European refining margins weakened further as product cracks fell across the barrel.”

Zhang reiterated, “China’s headline CPI is expected to hit 6% for June.” He noted, “As happened on all previous occasions, oil prices suffered a brief sell-off before recovering to the level prior to the news…Chinese monetary tightening tends to have a subdued impact on the oil market.”

Zhang said, “For now, the US economy shows signs of a rebound after the soft patch in April-May, as the disruption to the supply chain on the back of Japan’s earthquake has waned. However, the recovery will be sluggish as the most recent data suggest. We remain cautious on near-term oil prices, as the International Energy Agency’s oil releases have yet to work through the physical market. Nevertheless, there is still abundant liquidity in the financial system. In addition, the net length held by money managers has been cut back to the [lowest] level since November 2010. Both could drive oil prices even higher.”

WTI and Brent averaged $102.34/bbl and $116.98/bbl, respectively, in the second quarter compared with the Standard Bank Group’s forecasts of $105/bbl and $113/bbl. “The WTI-Brent spread averaged $14.64/bbl in the second quarter, significantly overshooting our forecast of $8/bbl,” Zhang said. Standard Bank isn’t changing its WTI price forecast for this year but is increasing its Brent price outlook for the third and fourth quarters by $8/bbl to an average $116/bbl for Brent in 2011. That would take the WTI-Brent spread to an average of $15/bbl. “For 2012, we maintain our forecast for the WTI price at $110/bbl, but increase our Brent price forecast by $5/bbl to $120/bbl,” said Zhang.

He predicted oil prices will “pause” in the third quarter “because of a softening global economy, the IEA’s express willingness to intervene, and still sluggish demand for oil products in most developed economies.” However, he expects oil prices to rally in the fourth quarter as weakness in the global economy and the temporary increase of crude with the release of emergency reserves “work their way through the system.” Zhang said, “The abundant liquidity in the financial system favors oil as a financial asset.”

US inventories
The Energy Information Administration said July 7 commercial inventories of benchmark US crudes declined 900,000 bbl to 358.6 million bbl in the week ended July 1, less than the Wall Street consensus for a 2.5 million bbl drop. Crude stocks remain above average for this time of year. Gasoline inventories were down 600,000 bbl to 212.5 million bbl in the same period, more than the 200,000 bbl decline analysts expected. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel stocks dipped 200,000 bbl to 142.1 million bbl. Traders were anticipating a 900,000 bbl increase.

The American Petroleum Institute earlier reported US crude inventories fell 3.2 million bbl to 357.1 million bbl last week. It reported gasoline stocks dropped 1.9 million bbl to 209.9 million bbl, with distillate fuel down 1.6 million bbl to 140.6 million bbl.

EIA reported imports of crude into the US increased 976,000 b/d to 9.9 million b/d last week. In the 4 weeks through July 1, crude imports averaged 9.1 million b/d, which was 546,000 b/d less than in the comparable period last year. Total motor gasoline imports last week averaged 700,000 b/d, with distillate fuel imports at 123,000 b/d.

The input of crude into US refineries inched up 68,000 b/d to a total 15.3 million b/d last week, with units operating at 88.4% of capacity, said EIA officials. Gasoline and distillate fuel production both increased to respective totals of 9.5 million b/d and 4.4 million b/d. That weekly report was delayed by a day due to the Independence Day holiday on July 4.

EIA also reported the injection of 95 bcf of natural gas into US underground storage last week. That put working gas in storage at 2.527 tcf, down 224 bcf from the year-ago level, and 48 bcf below the 5-year average.

Energy prices
The August contract for benchmark US sweet, light crudes slipped 24¢ to $96.65/bbl July 6 on the New York Mercantile Exchange. The September contract declined 25¢ to $97.13/bbl. On the US spot market, WTI at Cushing, Okla., kept in step with the front-month futures contract, down 24¢ to $96.65/bbl.

Heating oil for August delivery inched up 0.67¢ to $2.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.02¢ to $3/gal.

The August natural gas contract dropped 14.6¢ to $4.22/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 3¢ to $4.35/MMbtu.

In London, the August IPE contract for North Sea Brent crude dipped just 1¢ to $113.62/bbl.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.14 to $108.26/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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