MARKET WATCH: Unexpected inventory decline boosts crude oil price

The new front-month contract for benchmark US crude oil rebound by 1.5% Mar. 21 in the New York market following a government report of an unexpected draw last week from commercial inventories.

Natural gas rose 1.1%, “buoyed by technical buying,” said analysts in the Houston office of Raymond James & Associates Inc. However, crude, gas, and broader market prices declined in early trading Mar. 22, “bogged down by weak economic data out of China,” they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market was mixed again with West Texas Intermediate making some gains while Brent was little changed. Oil products were softer in general with reformulated stock for oxygenate blending (RBOB) gasoline faring better than the rest of the complex. The front-end of the Brent structure actually strengthened as refining margins in both northwest Europe and the Mediterranean improved substantially so far this week. The margin improvement was led by a strong gasoline crack, a softer dated Brent market, and very weak Urals price differentials in both regions.”

Nevertheless, Zhang said, “Oil is more exposed to the downside than to the upside for now. Since the beginning of this month, the market has been trading in a range-bound pattern, struggling to find direction. Implied volatility has declined substantially since the beginning of this year. We do not expect this relatively calm market condition to last long as the oil market braces itself for interventions or even shocks. We are starting to see implied volatility being undervalued, particularly at the front-end of the term structure.”

With retail gasoline now averaging $3.86/gal in the US, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The price of oil gains each week a greater place in the political debate, and the US president is traveling to the [Cushing, Okla., transportation and storage] hub today to explain all that he does to combat high oil prices. He will announce that the southern leg of the Keystone XL crude oil pipeline project (from Cushing to the Gulf Coast) is now a top priority and that all federal agencies should fast-track the project. It is a bit of a political show given that the southern leg of the XL did not require federal support, but nonetheless it will bring more focus to the Cushing to Gulf Coast pipelines expansions over the next 2 years.”

Jakob said, “It will be interesting to see whether the president refers or not to the Strategic Petroleum Reserve. The French ministry of energy still lists a stock release as one of the options available to bring prices down. It is interesting to see the western governments thanking Saudi Arabia for its ‘commitment’ to supply the markets while at the same time they make SPR contingency plans.”

Paul Horsnell, managing director of commodities research at Barclays Capital, London, said, “A strategic stock release, either unilateral or via the International Energy Administration, appears inevitable. However, we have doubts as to whether the execution and size of a release will be adequate to reduce prices for a sustained period.”

He said, “The market remains stretched in terms of spare [production] capacity in our view, and it is close to the point where the price-reducing effect of further output increases is likely to be countered by the price-increasing effect of perceived reductions in spare capacity.”

US inventories

The Energy Information Administration reported Mar. 22 the injection of 11 bcf of natural gas into US underground storage in the week ended Mar. 16, exceeding the Wall Street consensus for a 9 bcf injection. Working gas in storage increased to 2.38 tcf, up 766 bcf from the comparable period last year and 835 bcf above the 5-year average.

EIA earlier reported commercial US inventories of crude dropped 1.2 million bbl to 346.3 million bbl last week. The Wall Street consensus was for an increase of 2.2 million bbl. Gasoline stocks dropped 1.2 million bbl to 226.9 million bbl, short of the 2 million bbl decline analysts expected. Finished gasoline inventories increased while blending components decreased. Distillate fuel stocks gained 1.8 million bbl to 136.6 million bbl, countering the 2.2 million bbl draw the market expected (OGJ Online, Mar. 21, 2012).

“Overall, total petroleum inventories (including jet fuel, residuals, and unfinished oils) fell by 1.6 million bbl to 868.3 million bbl,” said Raymond James analysts. They attributed this to the unexpected draw in crude and lower petroleum imports, “which are tracking below the 5-year range.”

Raymond James analysts also noted US demand for gasoline, distillate, and total petroleum demand was down last week. “The standout was distillate demand, which dropped 16% to a 5-year low,” they said. “Separately, after 2 straight weeks of builds exceeding 2 million bbl, Cushing posted its first draw (200,000 bbl) in 4 weeks.”

Energy prices

The new front-month May contract for benchmark US sweet, light crudes regained $1.20 to $107.27/bbl Mar. 21 on the New York Mercantile Exchange. The June contract increased $1.16 to $107.75/bbl. On the US spot market, WTI at Cushing was up $1.26 to $106.87/bbl.

Heating oil for April delivery continued its decline, down 2.05¢ to $3.22/gal on NYMEX. RBOB for the same month dipped 0.6¢ but closed unchanged at a rounded $3.36/gal.

The April natural gas contract rebound by 2.5¢ to $2.36/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., slipped 0.3¢ to finish virtually unchanged at a rounded $2.19/MMbtu.

In London, the May IPE contract for North Sea Brent increased 8¢ to $124.20/bbl. Gas oil for April continued its fall, down $5.25 to $1,026.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 14¢ to $122.91/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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