MARKET WATCH: Crude markets torn between Middle East conflict, weak demand

Escalating conflict in the Middle East boosted crude oil prices in world markets Nov. 15, but indications of weakening demand triggered a selloff of US oil in late trading in the New York market.

“Brent managed another day of gains,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. As a result, the price spread between Brent and West Texas Intermediate increased to $25.53/bbl—“the highest closing level since October last year.” He said, “We still feel that the current spread is extreme, and while we have adjusted our view on the extent of a potential narrowing, we still deem a narrowing likely over the medium term.”

Ground reported, “Brent finally succumbed to concerns over weaker demand overnight,” giving up yesterday’s gain despite increased fighting between Israel and militant Palestinians in the Gaza Strip. But crude prices were higher in both New York and London in early trading Nov. 16 after Palestinian militants opened a new front, broadening their rocket attacks to include Jerusalem. Israeli military is considering enhancing its airstrikes with a ground campaign in Gaza. The possible spread of the Israel-Gaza conflict to other Middle East countries “leaves the door wide open for another price spike,” Ground said.

In Houston, analysts with Raymond James & Associates Inc. reported a 1% drop in crude on the New York market Nov. 15 despite a bullish inventory report. “Natural gas fell 1.5% on larger than expected storage. Energy stocks were mixed: the Oil Service Index traded up 1.3% while the SIG Oil Exploration & Production Index fell 0.5%.” They also noted, “The market slump following last week's election, with six declines in seven sessions, has already cost the Dow Jones Industrial Average almost 700 points.”

The Energy Information Administration reported commercial US inventories of crude increased 1.1 million bbl to 375.9 million bbl in the week ended Nov. 9, well short of Wall Street’s consensus for a build of 2.7 million bbl. Gasoline stocks dropped 400,000 bbl to 201.9 million bbl in the same period, less than the 1 million bbl decline analysts expected. Both finished gasoline and blending components declined. Distillate fuel inventories fell 2.5 million bbl to 115.5 million bbl, outstripping market expectations of a 1 million bbl decline. EIA also reported the withdrawal of 18 bcf of natural gas from US underground storage last week. That reduced working gas in storage to 3.911 tcf. However, stocks are still 71 bcf higher than a year ago and 209 bcf above the 5-year average (OGJ Online, Nov. 15, 2012).

Total petroleum inventories including jet fuel, residuals, and unfinished oils, fell 3.3 million bbl to 856.5 million bbl last week, due primarily to an unexpectedly large decrease in distillate stockpiles and a smaller-than-expected build in crude. “Refinery utilization increased slightly to 86.4%, which was expected in view of East Coast refineries coming back online after Hurricane Sandy disruptions,” said Raymond James analysts. Cushing, Okla., inventories bounced back from the prior week's decline to 43.7 million bbl and are currently 11.7 million bbl higher than year-ago levels. Total days of supply slipped to 44.3 days and are now only 0.8 days above year-ago levels.

Petroleum product production climbed to 6.7 million b/d last week—“the highest since May 1994, while the 4-week average of implied demand came in lower than the previous week,” Ground said.

In other news, the Environmental Protection Agency denied requests from governors of Arkansas, Delaware, Georgia, Maryland, New Mexico, North Carolina, Texas, Utah, Virginia, and Wyoming to waive production requirements for corn-based ethanol that, acerbated by drought, has driven up feed costs for poultry, hog, and cattle farmers. EPA officials said the required production of 13.2 billion gal of ethanol this year and 15 billion gal by 2015 will have little impact on corn prices.

Energy prices

The December contract for benchmark US light, sweet crudes lost 87¢ to $85.45/bbl Nov. 15 on the New York Mercantile Exchange. The January contract dropped 88¢ to $85.87/bbl. On the US spot market, WTI at Cushing was down 87¢ to $85.45/bbl.

Heating oil for December delivery decreased 1.47¢ to $2.97/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, increased 1.72¢ to $2.70/gal.

The December natural gas contract fell 5.7¢ to $3.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gave back 2.5¢ to $3.63/MMbtu.

In London, the December IPE contract for North Sea Brent climbed $1.37 to $110.98/bbl. Gas oil for December advanced $2.75 to $931/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes rose $1.02 to $107.23/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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