MARKET WATCH: Natural gas snaps rally; crude prices continue to rise

Crude oil prices managed modest gains July 25 despite a federal report of an unexpected jump in inventory, but natural gas snapped its recent rally in the New York market.

Total US petroleum inventories “took the contrarian approach of consensus, climbing 8.6 million bbl against estimates of a draw of 600,000 bbl,” said analysts in the Houston office of Raymond James & Associates Inc. The SIG Oil Exploration & Production Index and the Oil Service Index continued their declines, down 0.3% and 2.1% respectively. Natural gas dropped almost 4% following the restart of several nuclear power plants previously down for maintenance.

Broader markets held their ground in the July 25 session with positive corporate earnings reports offset by an ongoing Chinese election-year push to boost exports by deflating the yuan, Raymond James analysts said.

In early trading July 26, equity stock prices shot higher in European markets while the Dow Jones industrial Average, Standard & Poor's 500 Index, and the Nasdaq composite index escalating after European Central Bank President Mario Draghi indicated at an investor conference in London the possibility of market intervention to reduce cripplingly high borrowing costs for Spain and Italy.

US inventories

The Energy Information Administration reported commercial US crude inventories increased 2.7 million bbl to 380.1 million bbl in the week ended July 20, above average for this time of year. Wall Street’s consensus was for a 1 million bbl draw. Gasoline stocks jumped 4.1 million bbl to 210 million bbl. Analysts also expected a 1 million bbl decrease in that category, but both finished gasoline and blending components rose last week. Distillate fuel inventories gained 1.7 million bbl to 125.2 million bbl, outstripping the market’s outlook for an increase of 1.4 million bbl. Nevertheless, distillate stocks remain below average (OGJ Online, July 25, 3012).

Raymond James analysts said, “Yesterday's petroleum inventories update was very bearish relative to consensus, as unexpected builds in gasoline and crude were compounded by a larger-than-expected build in distillates. The builds were driven by higher imports, with product imports up 900,000 b/d and crude imports up 700,000 b/d. That more than offset strengthening demand, as total petroleum product demand increased 2.6% over the prior week. Notably, refinery utilization increased from 92% to 93% to reach its highest level since August 2007. The high utilization rate also contributed to the build in gasoline and distillate inventories. Cushing inventories rose 200,000 bbl week-over-week, following 2 weeks of sizable builds. Combining supply and demand, total days of supply decreased 0.7 days and are 2.5 days below year-ago levels.”

Unlike some analysts, Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “We are not surprised by this increase in crude stocks, as we have been concerned…that if product inventory levels don’t improve over the US driving season it could spell weaker demand for crude down the line. Yesterday’s data could signal that this weaker demand for crude is starting to appear.”

Oil prices fell after the EIA released its weekly report, but markets recovered prior to closing “as crude and commodities in general continued to receive support from a stronger euro,” Ground said. “Of course, as we approach next week’s Federal Open Market Committee [the policy-making arm of the Federal Reserve Bank], expectations of [a third round of quantitative easing] are also playing their part in keeping commodities well supported.”

However, he said, “Today this support appears to be faltering. Perhaps markets are worried that today’s US durable goods and jobless claims data will not be disappointing enough to prompt a reaction from the Fed. Some dollar strength is also playing a part in putting downward pressure on crude oil.”

On July 26, EIA reported the injection of 26 bcf of natural gas into US underground storage in the week ended July 20—exactly in line with the Wall Street consensus. That brought working gas in storage to 3.189 tcf, up 487 bcf from the comparable period last year and 435 bcf above the 5-year average.

Energy prices

The September and October contracts for benchmark US sweet, light crudes rose 47¢ each to respective closings of $88.97/bbl and $89.25/bbl July 25 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., continued in step with the front-month futures contract, also up 47¢ to $88.97/bbl.

Heating oil for August delivery increased 1.96¢ to $2.84/gal on NYMEX. However, reformulated stock for oxygenate blending for the same month continued its decline, down 3.19¢ to $2.79/gal.

The August natural gas contract fell 11.7¢ to $3.07/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.8¢ to $3.15/MMbtu.

In London, the September IPE contract for North Sea Brent gained 96¢ to $104.38/bbl. Gas oil for August decreased $1.50 to $886.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 30¢ to $100.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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