MARKET WATCH: WTI, crude futures post modest gains in mixed market

Crude oil futures and spot prices posted modest gains Mar. 27 in the New York market ahead of a government report of big jump in inventory while prices for petroleum products and natural gas declined.

“The broader market pulled back from nearly 4-year highs as the first quarter of the year nears an end despite hints from Federal Reserve Chairman Ben Bernanke that an additional round of quantitative easing may be around the corner. Commodities followed suit, with Brent closing down slightly as the US mulls a release of strategic oil reserves to help curb rising fuel prices and forecasts for more mild weather pressure natural gas prices (down 1%),” said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix in Zug, Switzerland, noted, “Each time the Standard & Poor’s 500 Index drops a few points, we have somebody from the Fed giving a sound-bite that ‘all options are on the table, including [a third round of quantitative easing to stimulate the economy].’ On the other hand, each time we have crude oil increasing by a few points, we have somebody from the Energy Department giving a sound-bite that ‘all options are on the table, including the Strategic Petroleum Reserve.’ That was again the case yesterday; welcome to the new managed economy.”

He said, “France and the UK have joined the SPR release-talk club as Saudi Arabia has failed to deliver any control of the market. It remains that you can’t SPR-out of a war or absolute sanctions against Iran.”

Meanwhile, negotiations between Iran and the West are to reopen Apr. 14 in Istanbul. “That first meeting is likely to be pivotal for the flat direction in the second half of the year. Hedge funds are heavily invested on the long side of crude oil, hence any good vibes coming out of that meeting will be a risk for the current speculative long positions,” Jakob said.

Crude inventory jumps

The Energy Information Administration said Mar. 28 commercial US inventories of crude shot up 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. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 700,000 bbl to 135.9 million bbl, exceeding the 500,000 bbl decrease analysts were expecting.

Imports of crude into the US escalated by 1 million b/d to 9.3 million b/d last week. Yet in the 4 weeks through Mar. 23, imports averaged 8.7 million b/d, down just 44,000 b/d from the comparable period a year ago, said EIA officials. Gasoline imports last week averaged 564,000 b/d while distillate fuel imports averaged 165,000 b/d.

The input of crude into US refineries increased a relatively modest 88,000 b/d to 14.5 million b/d last week with units operating at 84.5% of capacity. Gasoline production decreased slightly to 8.8 million b/d, but distillate fuel production increased to 4.3 million b/d.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The main oil benchmarks have traded in a fairly narrow range since the beginning of this month, except for some extremely short-lived rumor-driven spikes. Brent and West Texas Intermediate prices were little changed yesterday, with implied volatility dipping slightly lower again. Oil products underperformed crude as the recent spike in refining margins appeared too stretched. The very front-end of Brent structure strengthened following a gas leak in Total SA’s Elgin platform in the North Sea, which resulted in a shutdown of the platform with a loss of 60,000 b/d oil production to the Forties stream (OGJ Online, Mar. 27, 2012). In contrast, the WTI structure remained under pressure from a continuous inventory build at Cushing, Okla.”

Jakob said, “Crude oil futures currently lack both volume and volatility. Volume did pick up a bit yesterday, but volatility remains very low. This situation cannot last forever; the backwardation roll in Brent is not enough to be an investment model, and hedge funds can’t have the money parked forever in crude oil length…. Having length in crude oil at these levels can still be a trading theme if there is enough conviction that the war on Iran will intensify.”

The latest MasterCard Spending Pulse report of US retail gasoline sales at the pump report “shows no improvement in US demand: down 7% (653,000 b/d) from a year ago and down 6.6% (607,000 b/d) on the 4-week average,” said Jakob. “The MasterCard report and the DOE implied weekly demand do not tick with the US Vehicles Miles of Travel that was reported higher by 1.6% in January.”

In other news, Sudan and South Sudan accused each other of cross-border attacks on oil-producing areas—“just another sign that oil from South Sudan is unlikely to come back to the market any time soon,” said Zhang. “Low-sulfur fuel oil crack clearly has benefited from the loss of heavy, sweet crude from South Sudan since production was shut in.”

Energy prices

The May and June contracts for benchmark US light, sweet crudes gained 30¢ each to $107.33/bbl and $107.85/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing tracked the front-month futures contract, up 30¢ to $107.33/bbl.

Heating oil for April delivery declined 1.02¢ to $3.22/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 1.1¢ to $3.41/gal.

The April natural gas contract lost 1.8¢ to $2.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7.9¢ to $2.09/MMbtu.

In London, the May IPE contract for North Sea Brent retreated 11¢ to $125.54/bbl. Gas oil for April fell $4.25 to $1,025.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes inched up 1¢ to $123.50/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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