MARKET WATCH: EU inaction pulls down oil prices

Oil prices fell May 23 on the perception government leaders attending a discordant European Union summit in Brussels lack the political will to resolve the international economic problems that are undermining markets.

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “Crude oil markets, particularly West Texas Intermediate, lost a lot of ground yesterday as concerns over the Euro-zone intensified, sending the euro into a free-fall. Prices did stage a recovery later on; however, this fell short, and both Brent and WTI ended the day lower. Selling pressure resumed this morning after disappointing German manufacturing and business confidence data gave Euro-zone concerns center stage once again.”

The new front-month July futures contract for crude dropped 2% May 23 in the New York market. However, analysts in the Houston office of Raymond James & Associates Inc. said, “Natural gas extended its rally by tacking on another 1% on forecasts of a hot summer. The SIG Oil Exploration & Production Index and the Oil Service Index, tracking the rally in natural gas, gained a percentage point apiece.”

The EU summit adjourned May 24 with no concrete plans for shoring up the flagging European economy amid growing resistance to the austerity plans pushed by Germany.

Summit security “was so tight that it was a whole hour before they all stabbed each other in the back,” Raymond James analysts quipped. They said, “Tension between Germany's pro-austerity group and the new French-led pro-growth camp was palpable. While paying lip-service to keeping Greece in the Euro-zone, no real decisions were made, and some EU leaders appear to be resigning themselves to a ‘Grexit’” of Greece from the group of countries using the euro for common currency.

Raymond James analysts expect global economic uncertainty to continue at least until the June 17 Greek election.

Ground said the current dollar strength and petroleum product overhang may make it difficult for crude prices to sustain a rally. “Adding to the downward pressure on prices is the significant amount of Iranian crude now in floating storage, which could throw the market into oversupply if sanctions get lifted after the upcoming negotiations. Until there is more certainty over current negotiations with Iran, the market is unlikely to get too negative on oil supply,” he said.

US inventories

The Energy Information Administration reported the input of 77 bcf of natural gas into US inventory in the week ended May 18, slightly under the Wall Street consensus for an injection of 78 bcf. That raised working gas in storage to 2.744 tcf, up 750 bcf from a year ago and 753 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories increased 900,000 bbl to 382.5 million bbl in the same period, 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 Memorial Day. 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 (OGJ Online, May 23, 2012).

Raymond James analyst said, “Though this week's build came in below expectations, crude posted its ninth consecutive weekly build, and crude inventories remain at their highest level in 20 years. Notably, Cushing, Okla., inventories increased by 1.7 million bbl. Cushing inventories will be particularly interesting in coming weeks, following the start-up of the Seaway pipeline's reversal last weekend. Despite a 3.8% week-over-week decline in gasoline demand, gasoline inventories fell by a hefty 3.3 million bbl, likely a reflection of the 16% week-over-week decline in petroleum product imports. Total petroleum demand was down 1.7% week-over-week and down 1.2% year-over-year. In aggregate, total days of supply were up 0.6 day from last week, while 0.9 day below year-ago levels.”

Energy prices

The July and August contracts for benchmark US sweet, light crudes each lost $1.95 to $89.90/bbl and $90.20/bbl, respectively, May 23 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing was down $2.07 to $89.59/bbl.

Heating oil for June delivery declined 4.93¢ to $2.81/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 6.47¢ to $2.87/gal.

The June natural gas contract gained 3¢ to $2.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.3¢ to $2.59/MMbtu.

In London, the July IPE contract for North Sea Brent fell $2.85 to $105.56/bbl. Gas oil for June dropped $14.50 to $903.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $2 to $104.16/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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