MARKET WATCH: Oil prices climb despite bearish inventory report

Oil prices continued to recoup June 6 despite a relatively bearish update of petroleum inventories as a larger-than-expected increase in gasoline and an unexpected build in distillates more than offset a slight draw in crude.

“Broader markets rebounded strongly with the Standard & Poor’s 500 Index gaining more than 2% as talks of additional monetary stimulus from [the US Federal Reserve System] and a rescue package for Spain's ailing banking system led to bullish sentiment,” said analysts in the Houston office of Raymond James & Associates Inc. Crude closed up 1% in the New York market, but natural gas was down 1% after 2 days of gains.

Testifying before a congressional panel on June 7, Chairman Ben Bernanke said the Fed is prepared to take steps to revive the US economy if it weakens, but he didn't indicate any imminent action.

However, China unexpectedly cut its benchmark interest rates by 25 basis points, which spurred another rally in oil prices in early trading. The European Central Bank kept its benchmark interest rate unchanged yesterday but reiterated it stands ready to act if the situation deteriorates further.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil staged a strong rally during intraday trading yesterday, led by strong recoveries in the euro and the equity market. After the recent sharp sell-off across many risky assets, the market is hanging its hope on central bank actions to boost the economy and, more importantly, resolutions from the Euro-zone government of the ongoing debt crisis.”

Although petroleum products made gains in the June 6 market, Zhang said, “Gasoline again underperformed after a sizeable inventory build reported by the US Department of Energy. Implied volatility in the options market dropped sharply.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The dynamics of the euro-dollar [valuation] and of the S&P 500 helped support crude oil prices yesterday, although the correlations were not that strong. Crude oil was higher but without a full-blown conviction on the exogenous markets trade.”

US inventories

The Energy Information Administration reported the injection of 62 bcf of natural gas into US underground storage in the week ended June 1, up from Wall Street’s consensus for an input of 58 bcf. That raised working gas in storage to 2.877 tcf, which is 713 bcf more than last year at this time and 687 bcf above the 5-year average.

EIA earlier said commercial US inventories of crude dipped 100,000 bbl to 384.6 million bbl last week. That was short of the Wall Street consensus for a 500,000 bbl draw and left crude stocks above average for this time of year. Gasoline inventories escalated by 3.3 million bbl to 203.5 million bbl, surpassing analysts’ expectations of a 1 million bbl increase. Both finished gasoline and blending components increased last week. Distillate fuel stocks climbed 2.3 million bbl to 120 million bbl, counter to an anticipated reduction of 300,000 bbl (OGJ Online, June 6, 2012).

“Despite the build in product inventories, total petroleum product demand increased 0.5% week-over-week,” said Raymond James analysts. “It is worth noting US refinery utilization increased to 91% from 89.1% the previous week, contributing to the fall in crude inventories and the increase in petroleum product inventories. Crude inventories fell for the first time in 10 weeks, but Cushing, Okla., inventories continued to increase (up 900,000 bbl) despite the recent Seaway pipeline reversal and are still 8.9 million bbl above last year's levels. In aggregate, total days of supply increased 0.5 days and are 1.1 days above year-ago levels.”

Jakob said, “Contrary to previous weeks, most of the stock build was not in the ‘other products’ category but in the main visible clean petroleum products. Crude oil stocks were flat during the week, but that included a 3.9 million bbl decrease in the discounted West Coast Petroleum Administration for Defense District (PADD 5). Hence when combining the stock build in visible products and the crude oil stock build [in PADDs 1-4], there was a significant increase in stocks that count.”

He said, “The US equation is relatively simple. US crude stocks are at a very high level; production continues to increase and has to push itself either in higher exports of products or lower imports of crude oil. For now the level of crude oil imports is still too high compared with the increase in local production, and that will only get worse if a global economic slowdown reduces US product exports to Latin America or to Europe. The crude oil imports that the US needs to shut down will need to go somewhere else, and the light crude oil differentials in the Mediterranean are therefore still under very significant price pressure.”

However, Jakob noted, “Demand for gas oil in the Mediterranean is still strong, and Algeria is absorbing much higher volumes of gas oil in June-July than expected, as it suffers from lower output [because of] refinery maintenance.” Still, he said, “The gas oil cracks were supported yesterday and as well the gas oil-gasoline spread, but jet fuel differentials are still under some pressure.”

Energy prices

The July contract for benchmark US sweet, light crudes rose 73¢ to $85.02/bbl June 6 on the New York Mercantile Exchange. The August contract gained 76¢ to $85.33/bbl. On the US spot market, West Texas Intermediate at Cushing was up 73¢ to $85.02/bbl.

Heating oil for July delivery increased 3.81¢ to $2.67/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.56¢ to $2.69/gal.

The July natural gas contract dropped 2.5¢ to $2.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 0.1¢ to $2.40/MMbtu.

In London, the July IPE contract for North Sea Brent climbed $1.80 to $100.64/bbl. Gas oil for June escalated $17.50 to $865.50/tonne.

The Organization of Petroleum Exporting Countries’ office in Vienna was closed June 7, so no update of its basket price was posted.

Contact Sam Fletcher at samf@ogjonline.com.

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