MARKET WATCH: Oil prices continue retreat from Europe's economic woes

Oil prices continued their downhill slide May 16 with front-month crude down 1.3% in the New York futures market because of what analysts in the Houston office of Raymond James & Associates Inc. described as “the darkened outlook in Europe.”

Natural gas, however, jumped 4.7% in anticipation of a bullish US inventory report. Crude and corporate stocks were down while natural gas continued to rise in early trading May 17.

Meanwhile, the US Department of Labor reported new applications for unemployment benefits remained at a seasonally adjusted 370,000 for the second consecutive week. Benefits applications hit a 5-month high of 392,000 in April but have declined since.

“The oil market fell again yesterday amid continuous uncertainty over the future of the Euro-zone monetary union,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Better-than-expected US industrial production data and a slightly bullish set of Department of Energy US oil inventory data only managed to provide a very short-lived intraday rally.”

Gasoline fared better than crude and distillates in the futures market, “helped by a sizeable inventory draw reported by the DOE,” he said. “The spread between West Texas Intermediate and Brent narrowed sharply, as the spread continues to be driven by speculative money flows with few fundamentals to be anchored to.”

US inventories

DOE’s Energy Information Administration reported the injection of 61 bcf of natural gas into US underground storage in the week ended May 11. That surpassed Wall Street’s consensus for a 56 bcf input and raised working gas in storage to 2.667 tcf. Gas stocks are now 774 bcf above the comparable period a year ago and 773 bcf above the 5-year average.

EIA earlier said commercial US crude inventories increased 2.1 million bbl to 381.6 million bbl last week, exceeding Wall Street’s consensus for a 1.8 million bbl gain. Gasoline stocks dropped 2.8 million bbl to 204.3 million bbl, far surpassing analysts’ estimate of a 100,000 bbl dip. Both finished gasoline and blending components were down. Distillate fuel inventories decreased by 1 million bbl to 119.8 million bbl last week. The market was anticipating an increase of 200,000 bbl (OGJ Online, May 16, 2012).

Raymond James analysts said, “The draw in product inventories coincided with a 2% week-over-week increase in total petroleum product demand. Despite a 40% week-over-week increase in product imports, petroleum product inventories tracked noticeably lower this week, with gasoline and distillate inventories down 3.8 million bbl (West Coast and Midwest gasoline draw of 2.1 million bbl).” Crude inventory in Cushing, Okla., increased for the fifth consecutive week, up 1 million bbl last week to 5.1 million bbl above year-ago levels. “In aggregate, total days of supply fell by a day to 45.3 days—more than 2 days below levels from this time last year,” said Raymond James analysts.

Zhang expects US refinery run rates will continue to increase in coming weeks as part of the seasonal trend. “Meanwhile, implied demand for gasoline rose slightly, by 107,000 b/d, while demand for distillate fuel fell sharply, by 309,000 b/d week-over-week, both of which were likely to be driven by seasonal factors,” he said.

“In the physical market and products in general,” Zhang said, “demand is lackluster in the US and Europe. The crude market, however, has shown signs of tightening in fundamentals. The small contango in the dated Brent market, which appeared briefly over the past few weeks, has gone. Price differentials for physical crude cargoes seem to have bottomed out. The downside risk to the physical market is the significant amount of Iranian crude now in floating storage, which could throw the balance into over-supply if sanctions get lifted, following the upcoming negotiations [between Iran and the UN Security Council].”

Energy prices

The June contract for benchmark US sweet, light crudes dropped $1.17 to $92.81/bbl May 16 on the New York Mercantile Exchange. The July contract lost $1.16 to $93.19/bbl. On the US spot market, WTI at Cushing was down $1.17 to $92.81/bbl.

Heating oil for June delivery declined 3.54¢ to $2.90/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 2.34¢ to $2.92/gal.

The June natural gas contract, however, climbed 11.8¢ to $2.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 10.5¢ to $2.50/MMbtu.

In London, the June IPE contract for North Sea Brent fell 53¢ to $111.71/bbl. Gas oil for June lost 75¢ to $931.50/tonne.

The Organization of Petroleum Exporting Countries’ office in Vienna was closed May 17, so no price update was available for its basket of 12 benchmark crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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