MARKET WATCH: Oil, gas prices decline as Isaac diminishes

Crude oil and natural gas prices declined Aug. 29 even as the Obama administration talked of releasing oil from the Strategic Petroleum Reserve to compensate for the 1.3 million b/d of oil and 3.2 bcfd of gas production from federal leases in the Gulf of Mexico shut in when Hurricane Isaac hit the Louisiana coast.

West Texas Intermediate dropped 1.3% in the New York market after the Energy Information Administration issued a bearish report on US inventories for the week ended Aug. 24. Energy stocks followed crude lower with the SIG Oil Exploration & Production Index and the Oil Service Index down 1% each.

The Brent crude front-month contract is finding support at its 200-day moving average of $111.51/bbl. “However, unlike Brent, the WTI front-month contract price is failing to break above its 200-day moving average,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group.

In a “sleepy” session Aug. 29, “broader markets edged up in the lowest-volume full trading day this year, as investors chose to stay on the sidelines and wait to see if [Federal Reserve Chairman Ben] Bernanke's speech [scheduled Aug. 31 at the close of a conference for central bank executives in Jackson Hole, Wyo.] will excite investors or disappoint,” said analysts in the Houston office of Raymond James & Associates Inc. “And while market trading volumes have continued to lose steam this week, so did Isaac, which was downgraded to a tropical storm.”

If Bernanke does announce a third program of “quantitative easing” (QE) to stimulate the US economy, De Wet said, “Indications are that gold, silver, Brent, and aluminum are likely to move higher with the most certainty. These four commodities would be our top long picks on the back of QE. Brent and silver rallied strongly following QE2 (Brent rallied even before the start of the Arab Spring).”

There initially were no reports of major damage to Gulf Coast refineries or to production platforms and rigs in the Gulf of Mexico, so companies expect to resume operations rapidly. Meanwhile, the EIA released figures indicating US demand for petroleum rose 2% last week when prices were higher than now, driven mainly by increases in residual fuels and propane demand. Cynics say the administration’s real goal in releasing SPR crude would be to reduce energy prices further before of the presidential election.

The Bureau of Safety and Environmental Enforcement reported as of mid-day Aug. 29 workers had been evacuated from 505 of the 596 manned production platforms and 50 of the 76 rigs working in the Gulf of Mexico. It said 94.72% of daily crude production and 71.64% of daily gas production from federal leases in the gulf were shut in ahead of the storm.

In other news Aug. 30, the US Commerce Department reported consumer spending rose 0.4% in July, the fastest gain in 5 months; income increased 0.3%, the same as in May and June; but the rate of savings after taxes dipped to 4.2% from the year’s high of 4.3% in June. The Labor Department said initial claims for unemployment benefits increased by 374,000 seasonally adjusted, the same as the previous week.

Raymond James analysts noted the “positive rhetoric” for an "all of the above" approach to energy at the Republican National Convention in Tampa, Fla. The Republican platform would oppose all cap-and-trade legislation and “rein in the Environmental Protection Agency and end the agency's war on coal, also prohibiting any greenhouse gas regulations from being implemented,” analysts said.

They said, “We have already begun to see the courts impede the EPA's agenda, rejecting the Cross State Air Pollution rule and water standards, though the Mercury and Air Toxics Standards (MATS) remains in the courts.” However, support for fossil fuels still faces “headwinds,” they warned.

US inventories

EIA reported the injection of 66 bcf of natural gas into US underground storage in the week ended Aug. 24, up from Wall Street’s consensus for a 65 bcf gain. That increased working gas in storage to 3.374 tcf, up 429 bcf from the comparable period a year ago and 361 bcf above the 5-year average.

EIA earlier said commercial US crude inventories rose 3.8 million bbl to 364.5 million bbl last week, opposite Wall Street’s consensus for a draw of 1.8 million bbl. Crude stocks are above average for this time of year. Gasoline inventories dropped 1.5 million bbl to 201.2 million bbl, exactly as analysts predicted. Both finished gasoline and blending components declined. Distillate fuel stocks increased 900,000 bbl to 126.1 million bbl, exceeding the market’s outlook for a 200,000 bbl gain. Distillate inventories remain below average for the period (OGJ Online, Aug. 29, 2012).

De Wet observed, “Refining margins remain fairly healthy, and one would have expected crude oil demand from refineries to be high. As a result, the [report] is seen as more bearish than usual. Given the fairly healthy refinery margins and the large gasoline stock draw, it does appear as if the product market remains in better health than the crude oil market.”

Raymond James analysts said, “Combining crude, gasoline, and distillates, inventories rose by 3.1 million bbl last week, compared with the consensus forecast for a draw of 3.1 million bbl. The build was primarily driven by a hefty increase in crude imports, which were up 1.3 million b/d week-over-week (though still down year-over-year). Total refinery utilization remains high ahead of the customary end to [the US] summer driving season (Labor Day, Sept. 3) and was flat this week at 91.2%. Cushing, Okla., inventories were down slightly but remain 11.7 million bbl higher than year-ago levels. Total days of supply came down 0.7 day week-over-week and are 1 day below year-ago levels.”

Energy prices

The October contract for benchmark US sweet, light, sweet crudes lost 84¢ to $95.49/bbl Aug. 29 on the New York Mercantile Exchange. The November contract dropped 82¢ to $95.81/bbl. On the US spot market, WTI at Cushing was down 84¢ to $95.49/bbl.

Heating oil for September delivery dipped 0.46¢ but closed essentially unchanged at a rounded $3.12/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 2.58¢ to $3.10/gal.

The September natural gas contract decreased 2¢ to $2.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 6¢ to $2.65/MMbtu.

In London, the October IPE contract for North Sea Brent lost 4¢ to $112.54/bbl. Gas oil for September slipped 50¢ to $978.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 32¢ to $109.90/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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