MARKET WATCH: Crude and product prices slip lower in pessimistic market

Crude and petroleum product prices slipped lower Sept. 8 despite a bullish government report on US inventories before President Barack Obama’s speech to a joint session of Congress.

Obama proposed a $447 billion jobs package he claimed would stimulate the economy without adding debt. But industry analysts and investors apparently aren’t buying into that plan.

Ahead of Obama’s speech to joint houses of Congress, the Dow Jones Industrial Average “pulled back just over 1% while oil was relatively flat,” said analysts in the Houston office of Raymond James & Associates Inc.

“Natural gas remained in positive territory gaining 1%. The Oil Service Index and SIG Oil Exploration & Production Index (EPX) each traded down with the former retreating 2% while the latter only posted a 1% loss,” JRA analysts said. “This morning, the President's speech is taking a back seat to the G-7 meeting as Dow futures are down a modest 50 points while crude and natural gas are also trading lower.”

Meanwhile, they said, “Crude posted an larger than expected draw last week, made even more bullish by the fact that it included another sizable release of barrels out of the Strategic Petroleum Reserves. Specifically, commercial crude stocks fell 4 million bbl (down 8.9 million bbl if you back out SPR release) vs. a consensus call for a draw of 2 million bbl in the week.”

However, they said the report “was bearish on the product side,” with both gasoline and distillates reporting higher-than-expected increases. The mixed report “had a negligible effect on trading,” they said.

The weakening euro helped undermine oil prices while Obama’s call for still more financial stimulus “appeared to have failed to lift market sentiment,” reported James Zhang at Standard New York Securities Inc., the Standard Bank Group.  “Oil products weakened across the barrel, partly driven by the [weekly Energy Information Administration] inventory report, which has pushed European refining margin down by around $1/bbl. Meanwhile, the term structure for West Texas Intermediate strengthened further on another week of inventory draw at Cushing, Okla. Furthermore, Brent structure was much firmer on news of further delays in Forties crude cargoes.”


US inventories

The EIA reported commercial US crude fell 4 million bbl to 353.1 million bbl in the week ended Sept. 2. That was twice as big a drop as the Wall Street consensus, yet crude stocks remained above average for that time of year. Gasoline inventories increased by 200,000 bbl to 208.8 million bbl in the same period, counter to market expectation for a 1.4 million bbl fall. Distillate fuel stocks increased by 700,000 bbl to 156.8 million bbl, outstripping the consensus for a 500,000 bbl rise.

EIA also reported the injection of 64 bcf of natural gas into US underground storage last week. That brought working gas in storage to more than 3 tcf. However, that was 131 bcf less than in the comparable week in 2010 and 60 bcf below the 5-year average (OGJ Online, Sept. 8, 2011).

Crude inventories at Cushing, Okla., fell 400,000 bbl to 32.7 million bbl, “a new year-to-date low, which helped to strengthen WTI structure,” said Zhang. The sharp drop in US imports of crude last week was likely caused by shipping disruptions from Hurricane Irene and Tropical Storm Lee.” Implied demand for both gasoline and distillates dipped slightly on a 4-week running average basis, with gasoline demand setting new seasonal lows.

“A proper read of the US statistics this week is a little bit difficult due to the distortions created by Hurricane Irene; the report of next week will have some distortions due to Tropical Storm Lee; and the report of 2 weeks from now will probably have some data scars from [Tropical Storm] Nate,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

As of mid-day Sept. 8, the Bureau of Ocean Energy Management, Regulation, and Enforcement reported 5 of the 617 manned production platforms and 2 of the 70 rigs had not yet resumed operation in Lee’s wake. BOEMRE said 14.8% of pre-storm oil production and 6.8% of natural gas production from the gulf remained shut in.

“The platforms should be back to full production by tonight unless storm Nate starts to head towards the US Gulf Coast,” said Jakob on Sept. 9. Although Nate appeared destined for Mexico’s east coast as likely a Category 2 hurricane, nonessential personnel on some platforms in the US gulf sector were being sent ashore. Meanwhile, Jakob noted, “Some oil workers on a rig have gone missing in [Mexico’s] the Bay of Campeche.”

Mexican ports are likely to be closed by the storm, delaying oil exports to the US, he said.

The latest EIA data showed a 2.1 million bbl stock draw from commercial inventories along the Gulf Coast. “But that still leaves the crude oil stock levels in the region (thanks to the Strategic Petroleum Reserve transfers) at comfortable levels to weather out some further disruptions to production,” Jakob said. Next week, US Gulf Coast statistics “will probably show a stock-draw impact from the shutdown of the Louisiana Offshore Oil Port Inc. discharge port during the passage of Lee,” he predicted.

“Overall the US had a stock draw of 4.3 million bbl but with a 3.7 million bbl draw in the [East Coast] region that was impacted by Hurricane Irene,” Jakob said. “Due to Irene, ships were not discharging, refineries were running lower, and it is therefore difficult to make too much of this draw given that the delayed cargoes should show back in the following reports.”

Jakob said, “We should start to enter soon the period of lower refinery demand in the Midwest while crude oil imports into [that region, including Cushing] have been trending higher on the 4-week average. For now this has translated in crude oil stock-build outside of Cushing but given that there we are starting to move back towards capacity of storage, we could see some builds starting to re-develop in Cushing,” Jakob said.

In other news, Zhang said, “As expected by the market, the European Central Bank and Bank of England left their benchmark rates unchanged yesterday. Both central banks were not prepared to get ahead of the US Federal Reserve in providing further monetary easing; in addition, the ECB acknowledged that the downside risk to the economy had intensified. We still expect that the Fed will deliver on further easing in its September meeting, with the ECB and BoE likely to follow (with a couple of months lag).”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said natural gas prices continue to languish despite extreme weather events that should have been helpful to demand. We expect driven downside risks to US growth, and normalization in weather patterns will sustain headwinds.”


Energy prices

The October contract for benchmark US light, sweet crudes declined 29¢ to $89.05/bbl Sept. 8 on the New York Mercantile Exchange. The November contract dropped 32¢ to $89.23/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., matched the front-month futures contract’s loss, down 29¢ to $89.05/bbl.

Heating oil for October delivery fell 3.13¢ to $3.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 2.28¢ to $2.89/gal.

The October contract for natural gas, however, gained 4¢ to $3.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 1¢ to $3.99/MMbtu.

In London, the October IPE contract for North Sea Brent was down $1.25 to $114.55/bbl. Gas oil for September increased 25¢ to $967/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated by 82¢ to $112.15/bbl.

Contact Sam Fletcher at


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