MARKET WATCH: US budget malaise drags down oil prices

Oil prices continued to slip Dec. 5 with the front-month crude contract down 0.5% in New York as Congress continued to run out the clock with no budget agreement.

“As the finger pointing and name calling continued, broader markets latched on to President Barack Obama's comment that a deal could get done in a week. We are not entirely sure that a compromise is possible that quickly, but the Dow Jones Industrial Average was up 0.6% yesterday despite no hard evidence,” said analysts in the Houston office of Raymond James & Associates Inc. The Oil Service Index performed in line with the market, but the SIG Oil Exploration & Production Index jumped 3.2% “with the pop largely attributable” to Freeport-McMoRan Copper & Gold Inc.’s plans to acquire Plains Exploration & Production Co. and McMoRan Exploration Co. in cash-stock transactions (OGJ Online, Dec. 5, 2012).

“The drag on oil markets was heightened by a massive build in US product inventories. Again it was Brent that was the hardest hit,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. Front-month natural gas in New York was up almost 4% in the Dec. 5 session.

Ground said, “The West Texas Intermediate-Brent spread closed at its lowest level since early November at $20.91/bbl, reflecting both an easing of Middle East concerns but also an indication that the US economy and potential threats to it are still a major driver of global oil markets.”

US inventories

The Energy Information Administration said commercial US crude inventories dropped 2.4 million bbl to 371.8 million bbl in the week ended Nov. 30, wrecking Wall Street’s consensus for a 500,000 bbl decrease.

Crude stocks remained well above average for this time of year, nevertheless. Gasoline inventories jumped 7.9 million bbl—“the largest increase of the past 11 years,” said Ground—to 212.1 million bbl last week, outstripping the market’s prediction of a gain of 1.6 million bbl. “Implied gasoline demand came in slightly lower at 8.7 million b/d compared with 8.8 million b/d in the previous week,” Ground said.

Distillate fuel stocks climbed 3 million bbl to 115.1 million bbl but are still below average. Analysts expected a distillate increase of only 900,000 bbl.

Ground said, “Given the dramatic increase in gasoline stocks, the outlook for future crude oil demand has darkened.”

Raymond James analysts said, “This petroleum inventories update was bearish relative to consensus, with a larger-than-expected draw in crude more than offset by hefty builds in gasoline and distillates. The 8.5 million bbl increase in ‘Big Three’ [crude, gasoline, and distillate fuel] inventories was driven overwhelmingly by gasoline…. Distillates and crude stocks mostly offset each other. Cushing, Okla., inventories fell 200,000 bbl, now at 45.6 million bbl (14.5 million bbl above year-ago levels).”

EIA subsequently reported a 73 bcf draw from US underground storage in the week ended Nov. 30, exceeding analysts’ outlook for a 67 bcf withdrawal. That reduced working gas in storage to 3.804 tcf, down 33 bcf from the comparable period in 2011 but 168 bcf above the 5-year average.

Energy prices

The January contract for benchmark US sweet, light crudes dropped 62¢ to $87.88/bbl Dec. 5 on the New York Mercantile Exchange. The February contract lost 61¢ to $88.47/bbl. On the US spot market, WTI at Cushing remained in step with the front-month futures contract, down 62¢ to $87.88/bbl.

Heating oil for January delivery declined 1.33¢ to $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 5.12¢ to $2.64/gal.

The January natural gas contract jumped 16.1¢ to $3.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 3.5¢ to $3.41/MMbtu.

In London, the January IPE contract for North Sea Brent fell $1.03 to $108.81/bbl. Gas oil for December was down $6 to $928/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 46¢ to $107.20/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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