MARKET WATCH: Energy prices rise in 'comfortable' market

Energy prices increased modestly across the board Apr. 25, pulled up by the broader market after the governing Federal Open Market Committee of the Federal Reserve Board said it still stands ready to initiate a third program of “quantitative easing” (QE) if the US economy weakens.

“Once again, the Fed delivered what the market wants,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Although the Fed is adopting a wait-and-see approach because it sees the US economy expanding, investors feel more comfortable to take on risky assets, including oil, with QE assurance from the Fed.”

Zhang said, “The stance taken by the Fed on its monetary policy highlights the biggest peril in being bearish on oil flat prices. Hence, we prefer expressing our bearish view through time spreads instead of flat prices. That said, the current environment doesn’t make it easy for either producers or consumers to make hedging decisions. Commercial hedgers do get help from a rather depressed level of implied volatility, which may not last forever given the many uncertainties in the market.”

Meanwhile, he said, “Latest data show that the UK economy had fallen into a (double-dip) recession in the fourth quarter of 2011 and the first quarter of 2012, and South Korea’s growth during the first quarter was the slowest for more than 2 years. Downbeat first quarter earning results from Vale SA and Caterpillar Inc. (both rely heavily on China) confirm the slowdown in China.”

The front-month futures contract rose 0.6% in the New York market as traders shrugged off yet another increase in US crude inventories. “Natural gas jumped a hefty 4.5% on news of growing demand and supply cuts out of Canada. The OSX [Oil Service Index] and EPX [SIG Oil Exploration & Production Index] followed the commodities higher, ending the day up 3.2% and 1.4%, respectively,” said analysts in the Houston office of Raymond James & Associates Inc.

US inventories

Raymond James analysts said, “Yesterday's petroleum inventories update was bullish relative to consensus, as an unexpected draw in distillates and a larger-than-expected draw in gasoline more than offset a larger-than-expected build in crude.” But unlike the previous report, they said, “This third straight weekly draw in total petroleum inventories was not a function of higher demand, as gasoline, distillates, and total demand all fell week-over-week.”

The Energy Information Administration said commercial US crude inventories escalated by 4 million bbl to 373 million bbl in the week ended Apr. 20, more than Wall Street’s consensus for a 2.8 million bbl increase. Gasoline inventories fell 2.2 million bbl to 211.7 million bbl in the same period, exceeding analyst’s expectations of a 1.5 million bbl decline. Both finished gasoline and blending components decreased last week. Distillate fuel inventories dropped 3.1 million bbl to 125.9 million bbl; the market anticipated a gain of 500,000 bbl (OGJ Online, Apr. 25, 2012).

EIA reported the injection of 47 bcf of natural gas into US underground storage in the week ended Apr. 20, up from Wall Street’s consensus for a 45 bcf increase. That brought working gas in storage to 2.548 tcf, up 872 bcf from a year ago and 908 bcf above the 5-year average

As for crude inventories, Raymond James analysts noted, “Total petroleum imports picked up [last] week to 10.6 million b/d from 10.4 million b/d the prior week. In aggregate, total days of supply were largely unchanged at roughly 46 days, about 1 day above levels this time last year. Finally, Cushing, Okla., inventories continued to rise (up 600,000 bbl) and remain above last year's levels.”

Most of the increase in crude inventories was on the Gulf Coast, largely because of the refinery maintenance season that will soon end. “While the report showed a sizable draw in product inventories, implied demand for gasoline and distillates fell by 279,000 b/d and 220,000 b/d, suggesting that US oil demand is not picking up materially amid high prices and the fragile economic recovery,” Zhang surmised.

He said, “The market expects the inventory decline in gasoline to halt in the next few weeks” ahead of the summer driving season. “In contrast,” Zhang said, “heating oil was boosted by the inventory report, as the market continues to unwind the very crowded long-gasoline, short-heat trade. Time spreads in Brent improved further amid signs of improved demand for crude from refineries.”

Energy prices

The June contract for benchmark US sweet, light crudes increased 57¢ to $104.12/bbl Apr. 25 on the New York Mercantile Exchange. The July contract rose 54¢ to $104.50/bbl. On the US spot market, West Texas Intermediate at Cushing was up 96¢ to $104.12/bbl.

Heating oil for May delivery gained 3.16¢ to $3.16/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, dipped 0.36¢ but closed virtually unchanged, also at a rounded $3.16/gal.

The May natural gas contract climbed 9.3¢ to $2.07/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 1.8¢ to $2/MMbtu.

In London, the June IPE contract for North Sea Brent increased 96¢ to $119.12/bbl. Gas oil for May was unchanged at $996/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 25¢ to $116.05/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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