MARKET WATCH: Ceasefire, reduced demand drop oil prices

Oil prices dropped Nov. 20, with crude wiping out the previous session’s gains in the New York futures market, but natural gas bounced back, eliminating its loss.

“Signs of an imminent ceasefire [between Israel and militants in the Gaza Strip] cooled oil prices in yesterday's trading,” said analysts in the Houston office of Raymond James & Associates Inc. On Nov. 21, Egyptian officials announced Israel and Hamas leaders agreed to a ceasefire to end a week of fighting.

Still, Raymond James analysts said, “While we would all be thankful for an Israel-Gaza ceasefire this Thanksgiving, the oil market, which tends to like a good old-fashioned risk premium, might not be.” Ceasefire agreements in the Middle East are often fragile.

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, reported, “Demand and oversupply considerations, especially concerning the US and the Euro-zone, dominated sentiment yesterday, bringing prices for both West Texas Intermediate and Brent down.”

Such concerns were heightened after Federal Reserve Chairman Ben Bernanke said the fiscal cliff resulting from Congressional deadlock over the budget poses a “substantial threat” to US economic recovery. “Given the already weak economic environment (in both the US and Europe) and uncertainty over the fiscal cliff (and the Euro-zone debt crisis), the market is particularly sensitive to prices pushing too high and the possibility of demand destruction,” said Ground.

In other news, the US Department of Labor said first-time applications for unemployment benefits fell last week by 41,000 to a seasonally adjusted 410,000, offsetting only part of the previous week's surge resulting from damage by Hurricane Sandy. Some 5.2 million US residents are now receiving government aid for unemployment.

US inventories

The Energy Information Administration said Nov. 21 commercial US crude inventories dropped 1.5 million bbl to 374.5 million bbl in the week ended Nov. 16, opposite the Wall Street consensus for a 1 million bbl gain. Gasoline stocks also were down 1.5 million bbl, to 200.4 million bbl in the same period. Analysts also were expecting a 1 million bbl build in that category. Finished gasoline inventories remained unchanged, but stocks of blending components fell. Distillate fuel inventories decreased 2.7 million bbl to 112.8 last week, exceeding the market’s outlook for a 1 million bbl decline.

Imports of crude into the US were down 102,000 b/d to 7.8 million b/d last week. In the 4 weeks through Nov. 16, crude imports averaged 7.9 million b/d, which was 721,000 b/d less than in the comparable period a year ago. Gasoline imports last week averaged 616,000 b/d, while distillate fuel imports averaged 176,000 b/d.

The input of crude into US refineries increased 277,000 b/d to 14.9 million b/d last week with units operating at 87.5% of capacity. Gasoline production increased 9.2 million b/d last week, and distillate fuel production rose to 4.7 million b/d.

EIA said total propane and propylene inventories decreased 500,000 bbl to 72.7 bbl last week but remained well above average for the time of year. Record inventories at Mont Belveiu, Tex., has caused a steep fall in propane prices, said Raymond James analysts. “The new LPG exports facilities can't come fast enough as over the past month propane prices have fallen over 15% as [Gulf Coast] inventories have climbed to record levels,” they said. “With propane prices falling this should pressure ethane even further as the price of propane is the ceiling for ethane, while natural gas prices are the floor, which could spur on increased ethane rejection.”

Energy prices

The January contract for benchmark US light, sweet crudes fell $2.53 to $86.17/bbl Nov. 20 on the New York Mercantile Exchange. The February contract dropped $2.45 to $87.35/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.53 to $86.17/bbl.

Heating oil for December delivery declined 3.59¢ to $3.04/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 4.2¢ to $2.71/gal.

The December natural gas contract jumped 11.3¢ to $3.83/MMbtu, more than eliminating the previous day’s loss on NYMEX. On the US spot market, however, gas at Henry Hub, La., was down 3¢ to $3.62/MMbtu.

In London, the January IPE contract for North Sea Brent gave back $1.87 to $109.83/bbl. Gas oil for December decreased $7.25 to $944.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes retreated 43¢ to $108.33/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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