MARKET WATCH: Energy prices slide lower as economic woes rise

Energy prices dribbled lower June 14 with the front-month crude contract down 0.8% to an 8-month low in New York and North Sea Brent posting a minimal decline to its lowest level in 17 months.

“Crude tracked the broader market lower as weaker-than-expected US retail sales numbers and the looming Greek vote [on June 17] weighed on shares,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas also saw a 2.1% dip into the red on a forecast for extended cooler weather in the coming summer months.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market was softer yesterday on a slightly bearish US inventory report and ongoing uncertainty over the future of the Euro-zone. Oil products continued to outperform crude, in particular US gasoline due to another week of stock draws. Time spreads in both Brent and West Texas Intermediate were firmer, which is in sharp contrast with the alleged oversupply situation in the crude market. That said, price differentials for physical cargoes weakened during the last few days, while contango has emerged in the dated Brent market structure. In the options market, implied volatility softened slightly but remained substantially higher than back in April.”

Economic woes

Banks and investors are braced for the likelihood financially troubled and politically torn Greece will leave the Euro-zone, Raymond James analysts reported. The bigger economies of Italy and Spain also are at risk because of sovereign debt. Overnight, Moody’s Investors Service Inc. downgraded Spain's sovereign debt rating from A3 to Baa3, just one grade above junk status. In early trading June 14, Spain’s benchmark 10-year bonds rose to a record 6.96%, the highest level since 1999.

The US Department of Labor reported June 14 initial unemployment benefits applications rose by 6,000 to a seasonally adjusted 386,000. The government earlier revised the previous week up to 380,000 new applications. The less volatile 4-week average rose for the third straight week to 382,000—the highest level in 6 weeks.

Not only are layoffs continuing, but employers have added a monthly average of only 96,000 jobs for the last 3 months, down from a monthly average of 252,000 new jobs in the previous 3 months.

The government also reported US consumer prices fell 0.3% in May, the largest decline since December 2008, signifying declining demand. All of these negative economic indicators raise doubts of the country’s economic recovery and puts more pressure on the Federal Reserve Board to take steps again to stimulate the US economy. Results of its earlier efforts to pump money into the economy appear to have been minor.

Meanwhile, ministers of the Organization of the Petroleum Exporting Countries meeting in Vienna were divided over oil production. Hurt by international sanctions, Iran wants OPEC to reduce production in order to raise oil prices. But Saudi Arabia has increased production in recent months. Analysts expect no changes from the current meeting.

US inventories

The Energy Information Administration reported the injection of 67 bcf of natural gas into US underground storage in the week ended June 8. That was below Wall Street’s input consensus of 75 bcf. Working gas in storage now stands at 2.944 tcf, up 708 bcf from the comparable period a year ago and 666 bcf above the 5-year average.

EIA earlier reported US inventories of crude declined 200,000 bbl to 384.4 million bbl last week. That is well below Wall Street’s consensus for a draw of 1.5 million bbl, leaving crude stocks still above average for this time of year. Gasoline inventories decreased 1.7 million bbl to 201.8 million bbl, below average supply for this seasonal period and counter to analysts’ predictions of an increase of 1.4 million bbl. Finished gasoline inventories increased while blending components stocks decreased last week. Distillate fuel inventories dipped 100,000 bbl to 120 million bbl; the market’s outlook was for an increase of 1.2 million bbl (OGJ Online, June 13, 2012).

Raymond James analysts said, “Petroleum inventories fell as a surge in demand trickled through the supply chain. Crude inventories saw their second draw in 10 weeks, while crude imports rose. Gasoline and distillate inventories saw draws, as gasoline and distillate demand jumped 5.6% and 9.1%, respectively.”

They noted refinery utilization inched up to 92% last week from 91%, helping spur the decline in crude stocks. “Overall, petroleum demand was up 6.5% week-over-week and is up 1.6% vs. last year on a 4-week moving average basis. Total days of supply fell 3 days and are 2.8 days below year-ago levels. Finally, Cushing, Okla., inventories fell, though only marginally,” they said.

Energy prices

The July and August contracts for benchmark US sweet, light crudes each lost 70¢ June 13 to $82.62/bbl and $82.92/bbl, respectively, on the New York Mercantile Exchange, wiping out their twin gains in the previous session. On the US spot market, WTI at Cushing was down 70¢ to $82.62/bbl, keeping pace with the front-month futures contract.

Heating oil for July delivery declined 1.06¢ to $2.61/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.52¢ to $2.66/gal.

The July natural gas contract dropped 4.7¢ to $2.19/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 0.5¢ to $2.20/MMbtu.

In London, the July IPE contract for North Sea Brent dipped 1¢ to $97.13/bbl. The new front-month July contract for gas oil gained $1.50 to $847.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes rose 57¢ to $95.56/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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