The front-month crude oil futures contract closed marginally lower Oct. 12, ending its latest rally in the New York market although the Standard & Poor’s 500 index rose for the sixth time in seven sessions. Natural gas futures also dropped, falling 3.6% with the forecast of milder weather and an expected build of gas in storage.
Crude prices initially climbed because of a weaker US dollar but failed to maintain their gains by the market’s closing bell. Crude oil has traded in conjunction with activity in the S&P 500 for most of this year.
“European and US Gulf Coast refining margins fell sharply, while the Singapore margin held up relatively well even though Shell’s refinery in Singapore is now partially back in operation,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The backwardation in Brent remains very steep amid low inventories. The West Texas Intermediate structure weakened slightly as the American Petroleum Institute reported an increase in Cushing, Okla., crude inventories for the first time in 7 weeks.”
API reported US crude stocks fell 3.8 million bbl to 340.4 million bbl in the week ended Oct. 7. It said gasoline inventories declined 1.2 million bbl to 211.2 million bbl, while distillate stocks dropped 3.1 million bbl to 151.9 million bbl.
On Oct. 13, however, the Energy Information Administration under the Department of Energy said commercial inventory of US crude increased 1.3 million bbl to 337.6 million bbl last week. Gasoline stocks fell 4.1 million bbl with decreases in both finished gasoline and blending components. Distillate fuel inventories dropped 2.9 million bbl to 154 million bbl, said EIA officials in a report delayed this week by the Columbus Day holiday in the US.
EIA said imports of crude oil into the US increased 386,000 b/d to 9.1 million b/d last week. In the 4 weeks through Oct. 7 crude imports averaged 9 million b/d, an increase of 115,000 b/d from the comparable period in 2010. Last week gasoline imports averaged 418,000 b/d while distillate imports averaged 117,000 b/d.
The input of crude into US refineries dropped 563,000 b/d to 14.5 million b/d last week, EIA said, with units operating at 84.2% of capacity. Gasoline production declined to 8.9 million b/d last week while distillate fuel production decreased to 4.4 million b/d.
EIA also reported the injection of 112 bcf of natural gas into US underground storage last week, up from the Wall Street consensus of 102 bcf input. That raised working gas in storage above 3.5 tcf. That’s 56 bcf less gas in storage than in the similar 2010 period but 68 bcf above the 5-year average.
Olivier Jakob at Petromatrix in Zug, Switzerland, noted API’s reported drawdown of crude stocks included a 2.4 million bbl draw in the “discounted” West Coast district and a 1.3 million bbl reduction in Gulf Coast inventories of crude. “The API is still 5.2 million bbl higher than the DOE on Gulf Coast crude oil stocks; hence there is a bearish API-DOE convergence risk…for crude oil.” On the other hand, he said, “The API-DOE convergence risk is bullish on products. The API is particularly lower on distillates.”
Zhang said, “The rather tight physical market since August has pushed the Brent curve into very steep backwardation. With the refining margins collapsing again in Europe, refineries are likely to cut runs and hold back from crude purchases. Although European refiners are running on very low inventories, the tight physical market is likely to curb any incentives to rebuild inventories.”
Jakob said, “The Brent November [contract] expires tomorrow, and the main trading action for the last 2 days has been a convergence trade on the front Brent spread and the Brent premium to WTI. The Dow Jones-UBS Commodity Index shifting some of its crude allocation from WTI to Brent in January will provide some support for the Brent premium to WTI, but in our opinion it will then also provide a good entry point to short that spread.” He said, “We expect that the current financial demand for Brent futures in commodity indices will be followed in the first half of 2012 by a structural change in the Atlantic Basin sweet crude oil physical supply and demand (due to loss of the East Coast refiners and Libya coming back faster than expected). Bottom line: we expect that the Brent premium to WTI will peak through the DJ-UBS Commodity Index shift.”
In other news, China’s latest trade data released overnight showed its crude imports down 700,000 b/d from a year ago. “September 2010 was a peak number followed by a very low number in October, hence October 2011 will show a big increase year-on-year,” Jakob predicted. “There is some base effect in the September comparison, but that will not change the fact that crude oil imports in China have been very steady rather than surging this year. On a year-to-date basis, Chinese crude oil imports are only 200,000 b/d higher than a year ago and are down 100,000 b/d for the third quarter 2011 compared to the third quarter 2010. Based on factual numbers, it is very hard to blame this year the Chinese for the gasoline prices paid at the pump in New York.”
Zhang said, “Year-to-date China oil imports increased by 4% or equivalent to approximately 150,000 b/d. Meanwhile, China’s domestic crude production has grown by about 2.5% so far this year or equivalent to less than 100,000 b/d. Even if a sharp seasonal demand increase materializes in the fourth quarter, it appears that China’s oil demand growth might significantly undershoot projections of 500,000 b/d year-on-year growth in 2011 made by the major agencies.”
The November contract for benchmark US sweet, light crudes declined 24¢ to $85.57/bbl Oct. 12 on the New York Mercantile Exchange. The December contract retreated 23¢ to $85.78/bbl. On the US spot market, WTI at Cushing was down 24¢ to $85.57/bbl.
Heating oil for November delivery increased 3.06¢ to $2.93/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 0.11¢ for the day, yet closed essentially unchanged at a rounded $2.75/gal.
The November contract for natural gas fell 12.7¢ to $3.49/MMbtu, wiping out most of its gains from the previous two sessions on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued climbing, up 1.9¢ to $3.55/MMbtu.
In London, the November IPE contract for North Sea Brent gained 63¢ to $111.36/bbl. Gas oil for October increased $6.50 to $918.50/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes jumped by $2.07 to $107.68/bbl.
Contact Sam Fletcher at firstname.lastname@example.org.