Energy prices fell across the board with front-month crude dropping 3.5% on the New York market following a bearish inventory report, natural gas down 1.1%, and Brent falling below $93/bbl in London.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Crude underperformed oil products again as the sell-off has been led by the apparent long liquidation in crude. The term structures across both the Brent and the West Texas Intermediate curves also fell really hard, which has pushed the first 12 months of the Brent curve and the whole WTI curve into contango. As result of the curve rotation, futures contacts at the back end have actually moved higher despite the around $3/bbl drop at the front end. In the options market, implied volatility spiked again as the flat price fell sharply.”
Crude prices continued to tumble in early trading June 21, but the price of gas rose following a government report of a lower-than-expected inventory increase.
Meanwhile, policy makers at the Federal Reserve Bank extended Operation Twist, a program to sell shorter-term securities and buy longer-term bonds to reduce long-term interest rates and encourage borrowing and spending. “While this is a form of stimulus, many market participants were looking for more,” said analysts in the Houston office of Raymond James & Associates Inc. It was the third in an unrelated series of 2-day meetings this week in which various government representatives fell short of what investors hoped they might accomplish (OGJ Online, June 20, 2012).
The Fed’s policy decision triggered a sell-off in the euro and general risky assets. However, Zhang said, “The equity market held up well across both sides of the Atlantic, with the US market recovering to the level before the Fed announcement. Since summer last year, the divergence between oil and equity continues to widen margins.”
No plans for a third program of “quantitative easing” (QE) by the Fed “means no theme of [cash] flows coming into commodities and into oil, but that is actually positive for US disposable income,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “As crude oil is starting to retrace close to the levels it was at before the start of QE2, the Fed has nothing to lose in letting gasoline prices fall (especially in front of the US presidential election). Lower US gasoline prices will in our opinion do a better job for the US consumer than propping up shares of Apple.”
He noted, “The US stock market was disappointed with the lack of QE3, but the Standard & Poor’s 500 Index was only marginally lower; the correlations between oil prices, equities and the euro-dollar [valuation] have totally broken down. That says something about the heaviness of the crude oil supply and demand; and we do think that the return of Brent to the contango club will be problematic for financial investors in crude oil.”
US inventories
The Energy Information Administration reported the injection of 62 bcf of gas into US underground storage in the week ended June 15, bringing working gas in storage above 3 tcf. That’s 680 bcf higher than last year at this time and 641 bcf above the 5-year average
EIA earlier said commercial US inventories of crude increased 2.9 million bbl to 387.3 million bbl last week, opposite Wall Street’s consensus for a 1.3 million bbl reduction. Gasoline stocks rose 900,000 bbl to 202.7 million bbl, a little short of analysts’ expectations of a 1 million bbl gain. Both finished gasoline and blending components inventories increased. Distillate fuel inventories were up 1.2 million bbl to 121.1 million bbl in the same period, compared with projections for a 1 million bbl addition (OGJ Online, June 20, 2012).
Raymond James analysts said, “Combining crude, gasoline, and distillates, inventories grew by 5 million bbl last week vs. the consensus forecast for a build of 700,000 bbl. The build in crude was driven in part by higher crude imports, which increased by 300,000 b/d week-over-week. Product imports also increased by 200,000 b/d, exacerbating the increase in overall petroleum inventories. Total petroleum demand was 4.2% lower, which also contributed to the build in inventories. Additionally, there was a small drop in the refinery utilization rate from 92% to 91.9%. Total days of supply increased 2.3 days and is 0.9 day above the year-ago level. Meanwhile, Cushing, Okla., inventories rose 400,000 bbl to 47.8 million bbl, which is 9.7 million bbl higher than this time last year.”
Jakob said, “US crude oil stocks are just a couple million bbl short of their all-time record high levels set in 1990. They are also 86 million bbl higher than in June 2008, and the increased pipeline and rail transport infrastructure since then means that the US crude oil supply security has never been this high.”
He said, “With implied oil demand still under pressure, the US is still importing too much crude oil. There is still about 14 million bbl of usable storage capacity in Cushing but the US Gulf Coast is still building stocks. As the US needs to reduce seaborne imports of crude oil, those barrels will have to head somewhere or sit still on the water, and that is translating in the WTI contango starting to spill into the Brent structure.”
Energy prices
The July contract for benchmark US sweet, light crudes dropped $2.23 to $81.80/bbl June 20 on the New York Mercantile Exchange. The August contract fell $2.90 to $81.45/bbl. On the US spot market, WTI at Cushing was down $2.23 to $81.80/bbl.
Heating oil for July delivery decreased 4.77¢ to $2.59/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 5.13¢, also closing at a rounded $2.59/gal.
The July natural gas contract declined 2.8¢ to $2.52/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., inched up 0.5¢ to $2.60/MMbtu.
In London, the August IPE contract for North Sea Brent continued to topple, down $3.07 to $92.69/bbl. Gas oil for July lost $3.75 to $841.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was still retreating, down 65¢ to $93.08/bbl.
Contact Sam Fletcher at [email protected]
