MARKET WATCH: Economic concerns set back oil prices

Oil prices inched higher most of the day but retreated in late trading May 22, with crude down 1% in the New York market among festering financial problems in the Euro-zone.

However, natural gas gained almost 4% in that market on expectations warmer weather will boost demand for power generation. Analysts in the Houston office of Raymond James & Associates Inc. reported, “Taking the cue from the broader market and oil, energy stocks tumbled as the Oil Service Index and SIG Oil Exploration & Production Index dropped 0.6% and 0.9%, respectively.” Crude and gas futures were lower in early trading May 23.

Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said Brent crude is still below the long-term trend support-line that started at the end of 2008 and remains vulnerable. “Brent crude needs to close above $108.80/bbl before it would appear to be on a better footing technically,” he said. “However, the euro weakness, or broad-based US dollar strength, is adding downward pressure to crude oil prices.”

De Wet said, “While the Brent crude oil market is fairly tight, as reflected in the backwardation, the product market is also weak. Inventory levels are at the higher end of the levels seen in the past 5 years while product demand…remains weak.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Refining margins in the Mediterranean  have been under pressure of the strong physical premiums for the last 2 weeks, but those have started to correct lower as margins are starting to move back to negative territory. In northern Europe, the Forties benchmark [crude] is still very strong; the danger for the Brent market, however, is that the artificial economics of Forties [crude marketed] to South Korea starts to have too significant of an impact on the price-discovery value of the Brent contract, given that the shipments of Forties crude to South Korea have nothing to do with supply and demand factors.”

However, Jakob said, “The refining margins on the US Gulf Coast are very strong, and this is a trend that will not go away, since at market-price the US Midwest and increasingly the US Gulf Coast have access to the cheapest crude available and also to cheap energy through US natural gas prices. The Seaway pipeline reversal has started; it will take about 2 weeks for the crude to reach the US Gulf Coast, and the line-fill will be about 2.3 million bbl. As work progresses on the pump stations, the flows will increase from the initial 150,000 b/d. Hence the growth to 400,000 b/d of capacity by the end of the year should be gradual with the start of each new pump configuration, rather than come as a whole at the end of the year.”

US inventories

The Energy Information Administration reported May 23 commercial US crude inventories increased 900,000 bbl to 382.5 million bbl in the week ended May 18, well below Wall Street’s consensus for a gain of 1.7 million bbl. Gasoline stocks fell 3.3 million bbl to 201 million bbl in the same period, exceeding analysts’ expectations of a 700,000 bbl draw before the start of the summer driving season on the upcoming Memorial Day holiday. Both finished gasoline and blending components decreased last week. Distillate fuel inventories decreased 300,000 bbl to 119.5 million bbl, short of a consensus for a 500,000 bbl decline.

The import of crude into the US dropped 298,000 b/d to 8.6 million b/d last week. In the 4 weeks through May 18, crude imports averaged 8.8 million b/d, down 98,000 b/d from the comparable period in 2011. Gasoline imports last week averaged 575,000 b/d while distillate fuel imports averaged 124,000 b/d.

The input of crude into US refineries was down 57,000 b/d to just under 15 million b/d last week with units operating at 88.1% of capacity. Gasoline production decreased to 8.9 million b/d. Distillate fuel production increased to 4.5 million b/d.

Energy prices

The expiring June contract for benchmark US light, sweet crudes lost 91¢ to $91.66/bbl May 22 on the New York Mercantile Exchange. The July contract fell $1.01 to $91.85/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., matched the front-month futures contract, down 91¢ to $91.66/bbl.

Heating oil for June delivery inched up 0.11¢ but closed essentially unchanged at a rounded $2.86/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.31¢ but also closed unchanged, at a rounded $2.94/gal.

The June natural gas contract climbed 9.8¢ to $2.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., slipped 0.7¢ to $2.59/MMbtu.

In London, the July IPE contract for North Sea Brent was down 40¢ to $108.41/bbl. Gas oil for June continued to increase, up $6.25 to $917.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 23¢ to $106.16/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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