MARKET WATCH: Weak economy drives energy prices down

Energy prices fell across the board May 30 as the euro’s drop to a 2-year low drove investors away from risky commodities and into US government bonds that are among the safest investments anywhere.

“Worries over the future of the Euro-zone continued to dampen market sentiment,” said analysts in the Houston office of Raymond James & Associates Inc. Due to the strength in the US dollar and concerns about a global economic slowdown, the front-month crude declined more than 3% to a 6-month low in the New York market on May 30. “Natural gas continued its losing streak, sliding more than 2% during the session. Energy stocks underperformed the broader market, with the Oil Service Index and the SIG Oil Exploration & Production Index declining 3.9% and 4.1%, respectively,” they said.

Stock markets retreated in early trading May 31 after the Commerce Department reported the US economy grew at an annual rate of 1.9% in the first quarter, down from its initial estimate of 2.2%.

The US Department of Labor also reported initial applications for unemployment benefits increased by 10,000 last week to a seasonally adjusted 5-week high of 383,000. A private payroll survey showed private businesses added 133,000 US jobs. Most economists had expected the job growth rate to accelerate.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The big picture it is still about the euro-dollar [valuation] and the fear of Greece, Spain, etc. The 10-year bond yields for Spain have risen to 6.7%, which is a 5.4% differential to the German bonds; this while the German 2-year bond yields are down to 0% (Spain on the 2 years is at 5%).”

Jakob reported, “On a marginal cost-of-production basis, on West Texas Intermediate we are still $8/bbl away from levels where we have to think about potential impact on North American crude oil production. On Brent, the downside limit is further away due to the Brent-WTI spread, which is still at risk.” He noted, “Saudi Arabia can afford a much lower Brent price due to the exceptional revenues it received in the first 4 months of the year with high export volumes (replacement of Iran) and high prices. This being said, we continue to like using the backwardated Brent structure to build length at the very back end of the Brent curve during the current flat price setback.”

US inventories

The Energy Information Administration said May 31 domestic US crude inventories increased by 2.2 million bbl to 348.7 million bbl in the week ended May 25, above the Wall Street consensus for a 1 million bbl increase. Gasoline stocks decreased 800,000 bbl to 200.2 million bbl, less than the expected 1 million bbl draw. Finished gasoline stocks decreased while blending components remained unchanged. Distillate fuel inventories fell 1.7 million bbl to 117.8 million bbl last week; analysts had expected distillate stocks to remain unchanged.

Imports of crude into the US increased 473,000 b/d to 9.1 million b/d last week. In the 4 weeks through May 25, crude imports averaged 8.9 million b/d, down 199,000 b/d from the comparable period in 2011. Gasoline imports last week averaged 796,000 b/d while distillate fuel imports averaged 71,000 b/d.

The input of crude into US refineries was up 182,000 b/d to 15.2 million b/d last week with units operating at 89.1% of capacity last week. Gasoline production increased to 9.2 million b/d just ahead of the start of summer driving season over the long Memorial Day holiday. Distillate fuel production increased to 4.6 million b/d.

EIA also reported the injection of 71 bcf of natural gas into US underground storage in the week ended May 25, matching Wall Street’s consensus. That brought working gas in storage to 2.815 tcf, up 732 bcf from the same period a year ago and 724 bcf above the 5-year average.

In its latest monthly report, the Department of Energy revised US petroleum demand lower by 194,000 b/d in March to 1.2 million b/d less than in March 2011. “Excluding LPGs, petroleum demand was down 970,000 b/d vs. last year (5.8%) and at the lowest level for a month of March since 1995,” said Jakob. However, he said, “Crude oil refinery runs were only 100,000 b/d lower than a year ago, as US refineries continue to massively export products to Latin America and Europe. If Latin America has some oil demand growth, this is not the case of Europe, and therefore part of the crude oil that is being run in the US has to be at the cost of displacing European refinery capacity.”

DOE said US crude production in March increased 630,000 b/d from year-ago levels. “Given that the US cannot export crude oil, [processors] just refine it and export it as product instead (product exports are 600,000 b/d higher than a year ago),” said Jakob. “US exports of distillates were again very high at 1.1 million b/d, which means that US refineries are running about 3.3 million b/d of crude oil to produce distillates for exports.”

Energy prices

The July contract for benchmark US sweet, light crudes fell $2.94 to $87.82/bbl May 30 on the New York Mercantile Exchange. The August contract lost $2.95 to $88.14/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.94 to $87.82/bbl.

Heating oil for June delivery dropped 6.9¢ to $2.74/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 4.83¢ to $2.86/gal.

The new front-month July contract for natural gas decreased 6.7¢ to $2.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 10.5¢ to $2.40/MMbtu.

In London, the July IPE contract for North Sea Brent was down $3.21 to $103.47/bbl. Gas oil for June fell $28.50 to $882.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $2.38 to $102.75/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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