MARKET WATCH: Economic worries continue undercutting energy prices

Energy prices continued to tumble Aug. 3, with front-month US benchmark crude futures dropping below $92/bbl amid continuing fears of a faltering global economy.

In Houston, analysts at Raymond James & Associates Inc. reported, “Weighed down by the fall in crude and milder forecasts, natural gas also posted a loss, closing down 1.5%.”

Reformulated blend stock for oxygenate blending (RBOB) was a loss leader in the New York market after the Energy Information Administration reported a larger-than-expected build of that inventory in the week ended July 29.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Distillates fared better on strong Asia market following the shutdown of  the Taiwan’s Formosa group’s 540,000 b/d refinery” in Mailiao.

Market Report Co., Moscow, said Taiwan’s Formosa group also shut in its adjacent 520,000 tonne/year Group II base oil plant because of a fire at a propylene pipeline at the end of July. Shutdown of the base oil unit forced the company to cancel all term and spot base oil shipments scheduled to load after the first week of August.

US inventories

Commercial US crude inventories increased 1 million bbl to 355 million bbl in the week ended July 29, said EIA officials. That was well below the Wall Street consensus of 2.3 million bbl based on deliveries of crude earlier sold from the US Strategic Petroleum Reserve. Yet it raised stocks above the average level for this time of year. Gasoline inventories rose 1.7 million bbl to 215.2 bbl last week, exceeding analysts’ expectations of a 1 million bbl gain. Finished gasoline inventories decreased while blending components inventories increased. Distillate fuel inventories inched up just 400,000 bbl to 152.3 million bbl, far short of market anticipation for a 3.4 million bbl build (OGJ Online, Aug. 3, 2011).

EIA subsequently reported the injection of 44 bcf of natural gas into US underground storage in the week ended July 29. That increased working gas in storage to 2.758 tcf, down 186 bcf from year-ago level and 68 bcf below the 5-year average.

The latest EIA data “continue to show a US market very well supplied,” said Olivier Jakob at Petromatrix in Zug, Switzerland. However, he said, “The US oil fundamental data are not enough to counter any negative influence of the global markets.”

He noted, “Crude oil only had a marginal stock build, and that includes a 4.5 million bbl transfer from SPR to commercial stocks. If the crude oil stocks on the US Gulf Coast continue to build towards record high levels due to the SPR releases, the crude oil stocks in the Midwest and Cushing, Okla., are coming off as refineries in the Midwest continue to run at full throttle to maximize on the exceptional refining margins based on West Texas Intermediate. It is easier to transport oil products by truck than crude oil.”

Jakob said, “On the 4-week average, implied US gasoline demand is down 3.6% vs. last year while distillate demand is down 0.7%. Overall, the US implied demand for clean petroleum products is down, on the 4-week average, 2.6% vs. last year and still trending down to the levels of 2009.”

In London, the ICE gas oil structure strengthened as the September-December spreads “moved into a small backwardation this morning,” said Zhang. “The European middle distillate crack gained around $1/bbl yesterday, which pushed European refining margins higher.”

The US Labor Department said Aug. 4 that initial applications for unemployment benefits edged slightly lower last week, down 1,000 to a seasonally adjusted 400,000—the lowest level in 4 months.

Some see that as a sign of slow improvement in the US job market from an 8-month high of 478,000 applications in April. But the report does not include how many unemployed people have used up their benefits and dropped off the government roll or how many may simply have given up the search for nonexistent jobs. Meanwhile, the number of first-time applications for unemployment benefits the previous week was revised up by government officials to 401,000 from the previously reported 398,000. Officials said weekly applications have hovered around 400,000 for 17 weeks.

The government is scheduled to release July employment figures Aug. 5. However, analysts generally expect the unemployment rate to be unchanged at 9.2%.

‘Currency wars’

In other news, Jakob said, “The currency wars are continuing. Japan decided overnight for direct intervention to sell the yen, a move that will ridicule the action of the Swiss National Bank and might actually force the SNB to do something more real.”

The Swiss central bank cut interest rates “as close to zero as possible” from 0.25% and said it will increase the supply of francs to money markets to curb the “massively overvalued” currency, the Bloomberg news service reported. As the European debt crisis has deteriorated in the last 2 months, the Swiss franc has surged 10% against the euro as a safe investment haven, impeding Swiss exports and economic growth.

For the next 5 days as the European Central Bank and the US Federal Reserve independently analyze their economic policies, Jakob said, “Oil should be more about the big macro-economic picture than about the micro-oil fundamental details.”

Jakob said, “Financial institutions continue to revise their third quarter gross domestic product numbers lower, and it will take greater imagination to have the forecasting department at the same time . . . calling for crude oil (Brent or Light Louisiana Sweet) to trade at $130/bbl. Even Barclays [Capital, the investment banking division of Barclays PLC], a perma-bull, is forced into revising down its forecast for oil demand growth for 2011. The revisions will come with the necessary line that ‘no one could anticipate that the economy would slow down that much;’ the reality, however, remains that high oil prices do have an impact on the global economy.”

Weather-wise, most forecasting models “continue to show Emily traveling towards the East Coast, although it still has to interact with land over Haiti,” Jakob said.

Energy prices

The September contract for benchmark US sweet, light crudes dropped $1.86 to $91.93/bbl Aug. 3 on the New York Mercantile Exchange. The October contract lost $1.87 to $92.33/bbl. On the US spot market, WTI at Cushing was down $1.86 to $91.93/bbl.

Heating oil for September delivery declined 7.27¢ to $3.02/gal on NYMEX. RBOB for the same month fell 10.6¢ to $2.93/gal.

The September contract for natural gas decreased 6.5¢ to $4.09/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.6¢ to $4.26/MMbtu.

In London, the September IPE contract for North Sea Brent dropped $3.23 to $113.23/bbl. Gas oil for August was down $13.25 to $954.25/tonne.The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.30 to $110.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com

 

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