MARKET WATCH: Energy prices fall despite supportive data

Brushing aside supportive economic data and a broadly positive equity market, the front-month crude contract dropped 1.9% Feb. 28 in the New York market on continued concerns that current high prices will destroy demand. Natural gas in that market was down 3.2%

“Oil products also followed crude down sharply. The front-end of ICE gas oil has moved to contango, reflecting a weak demand. However, the American Petroleum Institute report on weekly US oil inventories last night painted a relatively bullish picture of distillate fuels. As flat prices were sold off, the term structures in Brent and West Texas Intermediate also weakened substantially, which to some extent reflects the market’s concern over a possible release of petroleum reserves from the Organization for Economic Cooperation and Development countries,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

He said, “The US Secretary for Energy has already said reserve release is one of the options to consider. Today, the US Department of Energy is due to deliver a report to assess the impact of the Iranian sanction on the oil market, which could set the stage for the US government to calm oil prices during the crucial presidential election year. Meanwhile, Saudi Arabia is likely to push more oil into the market, in an attempt to prevent a stock release by the OECD countries.”

Recent US economic data indicate some recovery with consumer confidence and home sales up. “However, both can easily be derailed by high oil prices,” Zhang cautioned. “While geopolitical risks remain a real threat to oil supply, demand is being eroded by the current price levels. Technically, price actions in Brent during the last two sessions make it look increasingly bad. General sentiment in the oil market is reaching a tipping point, in our view. What appeared to be a golden opportunity for producer hedging during the last couple of weeks could disappear quickly.”

US inventories

The Energy Information Administration said Feb. 29 commercial US inventories of crude increased 4.2 million bbl to 344.9 million bbl in the week ended Feb. 24. That exceeded Wall Street’s consensus for a 1.1 million bbl build. Gasoline stocks were down 1.6 million bbl to 229.9 million bbl, exceeding analysts’ expectations of a 400,000 bbl draw. Both finished gasoline and blending components inventories decreased last week. Distillate fuel inventories dropped 2.1 million bbl to 141.4 million bbl, more than the expected 800,000 bbl decline.

Imports of crude into the US increased 96,000 b/d to 9.2 million b/d last week. In the 4 weeks ended Feb. 24, crude imports averaged 8.9 million b/d, an increase of 539,000 b/d from the comparable period last year. Gasoline imports last week averaged 599,000 b/d. Distillate fuel imports averaged 217,000 b/d.

However, input of crude into US refineries dropped 282,000 b/d to 14.6 million b/d with units operating at 83.6% of capacity. Gasoline production decreased to 8.9 million b/d last week, while distillate fuel production declined to 4.3 million b/d.

Energy prices

The April contract for benchmark US light, sweet crudes dropped $2.01 to $106.55/bbl Feb. 28 on the New York Mercantile Exchange. The May contract lost $2.02 to $107/bbl. On the US spot market, WTI at Cushing, Okla., broke step with the front-month futures contract, down $2.20 to $106.30/bbl, which also was the lowest intraday price Feb. 28 for the futures contract.

Heating oil for March delivery declined 6.26¢ to $3.22/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 8.82¢ to $3.04/gal.

The new front-month April natural gas contract lost 8.4¢ to $2.52/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 12.5¢ to $2.43/MMbtu.

In London, the April IPE contract for North Sea Brent declined $2.62 to $121.55/bbl. Gas oil for March dropped $10 to $1,027.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.10 to $122.15/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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