MARKET WATCH: WTI price continues to fall as Brent rallies

Oil prices fell May 15 in the New York market as benchmark US crude came under heavy selling pressure from the economic and political turmoil in Europe that also undermined the equity market.

The Standard & Poor’s 500 Index fell for the eighth time in 10 sessions. “Oil followed the broader market lower, finishing the day down roughly 1%” on the New York futures market, said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas bucked the broader trend and ended 2.8% higher for the day. Energy stocks underperformed the broader market, with the OSX [Oil Service Index] and EPX [SIG Oil Exploration & Production Index] declining 2.5% and 3.3%, respectively.”

In London, however, North Sea Brent managed a small rally. “The backwardation in Brent at the front-end of the curve significantly steepened ahead of the June Brent futures contract expiry today,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Meanwhile, the contango at the front-end of the West Texas Intermediate curve also steepened amid a sharp inventory build at Cushing, Okla. In the oil product market, gasoline underperformed middle distillates, with heating oil ending the day slightly positive.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The Greek turmoil continues and new elections will have to be called. ‘Merkozy’ [a term describing the political ties between German Chancellor Angela Merkel and former French President Nicolas Sarkozy] had not allowed [Greece’s former Prime Minister Georgios A.] Papandreou to run a referendum on staying within the Euro-zone, but democracy is coming back through this election challenge. The euro-dollar [valuation] is falling further as the exit of Greece from the Euro-zone is coming back as a likely outcome.”

In the interim, European demand for oil and petroleum products “is still very slow and trending worse,” Jakob reported.” The oil demand data out of Italy in February were horrible, but part of that could have been explained by the heavy snow falls. It wasn’t snowing in Italy last month, but oil demand there was in total implosion. Total oil demand for Italy in April was down 14.1% vs. a year ago, and that demand destruction was seen in gasoline, diesel, and jet fuel.”

First quarter gross domestic product figures for Italy released May 15 were “worse than expected with a contraction of 0.8% from the previous quarter.” Jakob said, “When we look at the oil demand figures for April we have to fear what the Italian GDP figure will be in the second quarter.”

He said, “Germany is doing better than Italy, and in between the two we have France where oil demand is also under pressure. April gasoline demand in France was down 8.6% vs. a year ago, diesel down 0.3%, and heating oil down 19.4%.”

Jakob said, “With the uncertainty over Greece, fears for Spain are growing; its [10-year] bond yields are rising again above 6% and are at extreme levels to the German bond yields. The bond yields on Italy are also rising. Yes, we have been there before a few months ago, but the bonds and social differentials between [southern Europe] and Germany are growing wider, and we should not be surprised about the rise of extremist political parties in southern Europe.”

Zhang acknowledged, “In the physical market and product demand in general are lackluster in the US and Europe.” However, he said, “The crude market has shown signs of tightening in fundamentals. The small contango in the dated Brent market, which appeared briefly over the past few weeks, has now gone. Price differentials for physical crude cargoes seem to have bottomed out. The downside risks to the physical market are 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].”

US inventories

The Energy Information Administration said commercial US crude inventories increased 2.1 million bbl to 381.6 million bbl in the week ended May 11, 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.

Imports of crude into the US were down 86,000 b/d to 8.9 million b/d last week. In the 4 weeks through May 11, crude imports averaged 8.9 million b/d or 60,000 b/d below the comparable period a year ago. Gasoline imports averaged 675,000 b/d last week while imports of distillate fuel averaged 81,000 b/d.

The input of crude into US refineries increased 302,000 b/d to 15 million b/d last week with units operating at 88.3% of capacity. Gasoline production increased to 9.1 million b/d while distillate fuel production rose to 4.5 million b/d.

Energy prices

The June contract for benchmark US light, sweet crudes fell 80¢ to $93.98/bbl May 15 on the New York Mercantile Exchange. The July contract dropped 78¢ to $94.35/bbl. On the US spot market, WTI at Cushing was down 80¢ to $93.98/bbl.

Heating oil for June delivery inched up 0.35¢ but closed essentially unchanged at a rounded $2.93/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continue to retreat, down 1.49¢ to $2.94/gal.

The June natural gas contract regained 6.9¢ to $2.50/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gave back 1.5¢ to $2.40/MMbtu.

In London, the June IPE contract for North Sea Brent was up 67¢ to $112.24/bbl. Gas oil for June declined $1.75 to $932.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 56¢ to $108.70/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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