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MARKET WATCH: Inventory jump brings down oil prices

Energy prices fell Mar. 28, with crude dropping 1.3% in the New York market following the federal report of a bigger-than-expected jump in inventory. Natural gas continued to decline, down 1%.

“The oil market came under pressure yesterday from a number of directions. A reserve release proposed by the US, backed by the UK and France, is being considered; Saudi Oil Minister wrote for the Financial Times affirming that the kingdom stands to keep the oil market well supplied; and the US reported a much larger-than-expected inventory build. A soft equity market did not help either,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“It used to be that Saudi Arabia produced more oil when it wanted lower oil prices,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Today when Saudi Arabia wants lower prices it produces an op-ed [article] in the Financial Times. The world needs proof of barrels, not words, and Saudi Arabia for now is delivering the latter rather than the former. If you are a large oil producer with spare capacity, it is easy to bring prices lower: you produce more, force oil into storage that then forces a contango structure that forces the speculators out of the market. Writing an op-ed is nice, but it also shows that you either do not want to or can’t produce more. The problem might be that if Saudi Arabia pushes more oil out, then given the tough financial penalties for dealing with Iranian crude oil there will be more countries moving away from Iranian crude oil, and while Saudi Arabia can replace some Iranian crude oil, it is much more difficult to replace all the Iranian exports and will also put Saudi Arabia at a greater risk of war with Iran.”

As for releasing emergency reserves of oil, Jakob reported, “The use of strategic stocks is supposed to be the last bullet, and if Western powers are seriously envisaging this then it only shows the lack of commitment they have received from Saudi Arabia to replace the Iranian oil that is falling under the embargo.” He said, “Looking at the way Europe has managed the Greek crisis, we should now expect a sound-bite about stock releases every day. The odd reality, however, is that France is currently refilling its strategic stocks of distillates and is expected to buy more during the summer.”

Jakob said, “The embargo on Iran is working and putting Iran in difficulty, but it was poorly planned and as a result it is also putting the rest of the world in difficulty. Planning the use of Strategic Petroleum Reserve stocks is a sign of weakness. Iran knows this, and at the current stage it is difficult to say that one party will have the upper hand in the [Apr. 14] nuclear talks. If the US, UK, and France want to bring prices down with SPR stocks, then maybe it would be an idea to time the release for Apr. 14 in an attempt to take a bargaining chip off the hands of Iran.”

US inventories

The Energy Information Administration said commercial US inventories of crude shot up by 7.1 million bbl to 353.4 million bbl in the week ended Mar. 23, far surpassing Wall Street’s consensus of a 2.6 million bbl increase and nearly twice the build earlier reported by the American Petroleum Institute. EIA said gasoline stocks fell 3.5 million bbl to 223.4 million bbl, more than twice the expected decline of 1.6 million bbl. Distillate fuel inventories dropped 700,000 bbl to 135.9 million bbl, exceeding the 500,000 bbl decrease analysts were expecting (OGJ Online, Mar. 28, 2012).

EIA subsequently reported the injection of 57 bcf of natural gas into US underground storage in that same week, exceeding Wall Street’s consensus for 48 bcf increase. The latest addition brought working gas in storage to 2.437 tcf. Stocks are 816 bcf higher than last year at this time and 900 bcf above the 5-year average.

The petroleum inventories update was bearish in that the surge in crude was only partially offset by larger-than-expected draws in gasoline and distillates. “Combining crude, gasoline, and distillates, inventories rose 2.8 million bbl compared with the consensus forecast for a build of 500,000 bbl,” said analysts in the Houston office of Raymond James & Associates Inc. “Contributing to the sequential build were crude imports of 9.3 million b/d, which is the highest crude import level since the first week of January.” On the other hand, they said, “Gasoline, distillate, and total petroleum demand each increased week-over-week with the standout being distillate demand, which rose 11.8% following last week's 16% sequential drop to a 5-year low. After a small draw the prior week, Cushing, Okla., posted a 1 million bbl build—its fourth build in 5 weeks. Cushing inventories sit at 39.6 million bbl or 2.3 million bbl lower than this time last year.”

Zhang said, “A shrinking refining capacity in the US has been the main driver for the outperformance in oil products so far this year. Implied demand for gasoline and distillates rose by over 300,000 b/d, which evened out the dip reported the week before. Although total product demand increased by 530,000 b/d week-over-week, it fell 400,000 b/d year-over-year on a seasonal adjusted basis.”

Energy prices

The May contract for benchmark US sweet, light crudes fell $1.92 to $105.41/bbl Mar. 28 on the New York Mercantile Exchange. The June contract dropped $1.89 to $105.96/bbl. On the US spot market, West Texas Intermediate at Cushing broke step with the front-month futures contract, down $1.83 to $105.50/bbl.

Heating oil for April delivery decreased 1.07¢ to $3.21/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 1.01¢ to $3.40/gal.

The April natural gas contract lost 1.7¢ to $2.19/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5¢ to $2.04/MMbtu.

In London, the May IPE contract for North Sea Brent dropped $1.38 to $124.16/bbl. Gas oil for April was down $1.75 to $1,024/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.25 to $122.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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