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MARKET WATCH: Crude price decline accelerates on bearish inventory report

The decline in oil prices accelerated Apr. 4 with crude dropping 2.5% in the New York market following a government report of a much larger-than-expected build in US crude inventory. The front-month gas contract also fell 2.1% in anticipation of a build in gas inventory, wiping out its gain from the previous session.

“The oil market was hit by a slew of bearish data, including a large oil inventory build, soft US data, and a dim outlook for the Euro-zone economy,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products again outperformed crude as product inventories continued to draw. The time spreads across the Brent curve were sold on improved crude supply and weak demand. The spread between West Texas Intermediate and Brent exceeded $21/bbl as investment money continued shifting from WTI to Brent.”

US inventories

The Energy Information Administration reported the injection of 42 bcf of natural gas into US underground storage in the week ended Mar. 30, surpassing the Wall Street consensus for an input of 33 bcf. That put working gas in storage at 2.479 tcf—up 887 bcf from a year ago and 934 bcf above the 5-year average.

EIA earlier said commercial US inventories of crude jumped by 9 million bbl to 362.4 million bbl in that same week, far above Wall Street’s consensus for a 2.5 million bbl increase. US crude inventories are above average for this time of year. Gasoline stocks, however, decreased 1.5 million bbl to 221.9 million bbl, slightly exceeding the expected draw of 1.4 million bbl. Both finished gasoline and blending components declined. Distillate fuel inventories remained unchanged at 135.9 million bbl; analysts had expected a 500,000 bbl reduction (OGJ Online, Apr. 4, 2012).

“Contributing to the sequential build, petroleum imports rose by 800,000 b/d (or 7%) vs. the prior week,” said analysts in the Houston office of Raymond James & Associates Inc. “Gasoline demand was down 3.8% while total petroleum demand was down 4.7% on a 4-week moving average basis vs. the prior year. With demand down and crude building, total days of supply remained at a historically high level of 48.4 days. Following the bearish inventory report, crude sold off in the afternoon.”

The EIA report showed a strong 12.4 million bbl build in total stocks, “which bring them 31 million bbl above the levels of a year ago and at a new multiyear high for this time of the year,” said Olivier Jakob at Petromatrix in Zug, Switzerland. Total US petroleum stocks could be even higher based on an Apr. 2 Department of Energy revision of January petroleum stocks up by 17 million bbl for a total increase of 20 million bbl for that month.

“When the DOE makes a large upward revision to stocks, there is always the risk that the monthly revisions start to spill into the weekly numbers,” Jakob said. “However the revisions to the January stocks were in products, not in crude (January crude oil stocks were revised higher by only 1 million bbl) while most of the stock build yesterday was in crude oil. Hence, we still carry a risk that stocks in products could be gradually increased in the weekly reports to readjust to the monthly update.”

Imports of crude into the DOE’s Petroleum Administration for Defense District (PADD) 2 covering the Midwest “reached an all-time record high last week,” said Jakob. “As we expected, this has contributed in narrowing the discount of Canadian Heavy Crude oil to WTI, but refineries in the Midwest still have a $62/bbl RBOB to Canadian Heavy Crude crack, and any unit that is not…on maintenance will be running at full blast. Stocks in Cushing, Okla., had a 700,000 bbl build, but we estimate that there is still about 20 million bbl of usable storage capacity so Cushing is not yet filled-up to the rim. In June, the combination of high runs (based on current economics) and the Seaway pipeline reversal will likely lead to a stabilization [of] stock draw in Cushing. The US Gulf Coast meanwhile is still at risk of a Strategic Petroleum Reserve release. The Brent-WTI spread has been widening in recent days but will be at risk of a narrowing of the Light Louisiana Sweet-WTI spread.”

Jakob noted a large crude oil stock build of 6.1 million bbl on the US Gulf Coast, “which brings stocks in that region 5 million bbl above the levels of last year.” He reported, “The Gulf Coast had suffered many traffic delays due to fog, and the stock-build might be partially due to delayed flows. However, in the second half of the month we should start to see the discharge of the voluminous shipments made by Saudi Arabia to the US [via a record number of very large crude carriers operated by Saudi-owned Vela International Marine Ltd.] We are going into a long weekend and given that the US aircraft carrier USS Vinson has been sent home from the Persian Gulf and that the threat of an SPR announcement is still valid in front of next week’s meeting [between Iran and members of the United Nation’s Security Council], we want to be protected during the long weekend for the announcement of a SPR release rather than for the US launching war on Iran.”

In summary, Jakob said, “The large stock builds speak by themselves but given the 17 million bbl [upward] revision [of] January weekly estimates, US stocks run the risk of being even higher. More long-haul crude from Saudi Arabia is on its way to the US Gulf Coast and could start to show up in the statistics at the end of the month. With the reversal of the Seaway pipeline, it does not look like the US Gulf Coast will be short crude oil during the peak season. This does not reduce the risk of a SPR release given that the goal of the SPR release is price management.”

In other news, Zhang said, “Economic data was also soft yesterday with the Institute for Supply Management (ISM) nonmanufacturing survey [for the US] disappointing the market, and the Euro-zone retail sales, which declined further. These have spurred a sharp risk-off move in the market, resulting in a sizeable fall across major equity markets and a weaker euro, which in turn dragged the oil market lower.”

Energy prices

The May contract for benchmark US sweet, light crudes fell $2.54 to $101.47/bbl Apr. 4 on the New York Mercantile Exchange. The June contract dropped $2.52 to $102.03/bbl. On the US spot market, WTI at Cushing was down $2.54 to match the front-month futures contract at $101.47/bbl.

Heating oil for May delivery continued to drop, down 6.66¢ to $3.16/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 6.18¢ to $3.33/gal, giving back much of its earlier gains.

The May natural gas contract ended its short rally, down 4.6¢ to $2.14/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued its rebound, up 7.4¢ to $2.06/MMbtu.

In London, the May IPE contract for North Sea Brent lost $2.52 to $122.34/bbl. Gas oil for April fell $20.75 to $1,012.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined by $1.01 to $121.94/bbl.

The OPEC office in Vienna will be closed Apr. 6 and Apr. 9, with no price updates issued. It also will be a short week for NYMEX commemorating Good Friday on Apr. 6.

Contact Sam Fletcher at samf@ogjonline.com.


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