MARKET WATCH: Crude market ignores OPEC overproduction

Crude oil prices remained flat Aug. 9 in the New York market even though the Organization of Petroleum Exporting Countries announced overproduction of 2.1 million b/d above its 30 million b/d target during the second quarter.

OPEC’s overproduction “hasn't been this high since 1998 following the Asian crisis,” said analysts in the Houston office of Raymond James & Associates Inc. Natural gas recouped some of its previous loss after the Energy Information Administration reported the injection of 24 bcf of natural gas into US underground storage in the week ended Aug. 3, below Wall Street’s consensus for an increase of 30 bcf (OGJ Online, Aug. 9, 2012).

Oil, gas, and equity prices were down in early trading Aug. 10 after China—the second biggest market after the US—reported a slowdown in its economy and the International Energy Agency in Paris reduced its month-old 2013 forecast of world demand for crude.

China said its import growth slowed to 4.7% in July from year-ago levels while its exports increased only 1%—“well below the forecast for an 8% increase,” said analysts at Standard New York Securities Inc., the Standard Bank Group. “Clearly, the European Union’s economic performance is a drag on China's exports. China’s exports to the EU actually decreased by 16.2% year-over-year in July. Import growth also undershot expectations, increasing by 4.7% in July, down from 6% in June, a sign of domestic weakness.”

The result is “an even stronger case for further government intervention” in China’s economy. However, Standard Bank analysts said, “Further fiscal stimulus by China is unlikely to have the same size and implementation as the stimulus package announced in 2008. We see a real risk that a potentially similar fiscal stimulus could result in an even more inefficient allocation of capital and thereby inflate property prices in China again. This would undo the efforts to bring property prices under control.”

They said, “Given that we believe that monetary policy in general will become more accommodative than fiscal policy (not only in China but elsewhere too), one has to favor commodities which respond the most to the monetary stimulus. We find that Brent crude, gold, and silver respond most to more accommodative monetary policy in a list of commodities that includes base metals, precious metals, and energy.”

EIA outlook

EIA cut its prediction of 2013 demand growth to 800,000 b/d, down from its earlier outlook of 1 million b/d growth. It now expects total global demand of 90.5 million b/d next year. It modestly increased its projection of 2012 demand to 89.6 million b/d.

“We continue to believe that global delevering and subpar economic growth persist in 2013, leading to year-over-year demand growth of 700,000 b/d to 90.3 million b/d,” Raymond James analysts said. They too peg 2012 world demand at 89.6 million b/d.

Raymond James analysts expect “more robust” growth in non-OPEC crude supplies in 2013, up 1.7 million b/d to 55.2 million b/d, compared with IEA’s projection of 700,000 b/d growth in non-OPEC crude to 53.9 million b/d. They noted, “Organization of Economic Cooperation and Development (OECD) total petroleum inventories fell counter-seasonally by 5.5 million bbl in June, as draws in product inventories more than offset builds in crude.”

In other news, the Department of Agriculture for the second consecutive month reduced its outlook for US corn production, down to the lowest level in 17 years. This spring US farmers sowed 96.4 million acres of corn and were forecasting a record harvest. But since then the primary farming regions of the US Midwest have been baked by the worst drought in decades. As a result, prices of food and ethanol additive for gasoline have escalated.

Energy prices

The September contract for benchmark US light, sweet crudes inched up 1¢ to $93.36/bbl Aug. 9 on the New York Mercantile Exchange. The October contract was unchanged at $93.63/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 1¢ to $93.36/bbl.

Heating oil for September delivery continued climbing, up 2.91¢ to $3.05/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 2.04 to $3/gal.

The September natural gas contract recouped 1.2¢ to $2.95/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued its decline, down 3.8¢ to $2.93/MMbtu.

In London, the September IPE contract for North Sea Brent increased $1.08 to $113.22/bbl. Gas oil for August gained $4 to $959.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes advanced 3¢ to $108.39/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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