MARKET WATCH: Unexpected inventory gain undercuts crude prices

A bigger-than-expected jump in US crude inventory overcame worries about the fate of Venezuela following President Hugo Chavez’s death, triggering reduction of oil prices Mar. 6.

“The market did not take kindly to the marked increase in crude oil inventories and, looking at the current level of these inventories, it is not hard to see why,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “At 381 million bbl, crude oil stocks are at unprecedented levels, at least for this time of year, and within reach of the 5-year high of 387 million bbl” recorded last June. “In terms of days of supply the picture looks equally bleak, with the current level well above what we’ve seen over the past 5 years,” he said.

“This has occurred against the backdrop of fairly stable crude oil production (7 million b/d), slightly weaker demand (although the 4-week average of implied demand has shown some resilience of late), and declining refinery utilization rates,” Ground said.

He said increases of crude inventories could continue because “US oil production is expected to push higher off the back of an anticipated increase in Bakken output this spring—a number of wells have been idled over winter.” Like most economic analysts, Ground is concerned how sequester and other fiscal hurdles will affect US economic growth and oil demand.

“A ramp up in refinery utilization rates could mitigate increases in crude oil inventories. However, although there is room for increased distillate production (stockpiles are currently extremely low), gasoline inventories are largely in line with the 5-year average,” he said. “Given these considerations, plus the disappointing off-take from the Seaway pipeline (thus limiting the removal of oil from Cushing, Okla.), we feel West Texas Intermediate prices should not stray too far from $90/bbl over the rest of this month, with the risks tilted to downside.”

Unaffected by oil inventory, the equity market continued to rally with the Dow Industrial Average hitting a record high. Economic indicators remain mixed, however. US retailers reported only a modest 1.7% increase in sales during February, down from a 4.5% gain in January as buyers took advantage of holiday clearances. Consumers apparently are still worried about the economy, analysts said.

Meanwhile, the US Department of Labor reported 340,000 first-time applications for unemployment benefits in the week ended Mar. 2, 7,000 fewer than the revised number from the previous week. As of Feb. 23, the latest data available, 5.4 million US residents were collecting unemployment benefits, down from 7.4 million in the comparable period a year ago. Some of the difference between 2012-13 figures includes an unknown number of unemployed persons taking part-time jobs or work at lower pay, as well as those who have exhausted their benefits or have given up looking for work.

In the week ended Feb. 23, the biggest decline in unemployment applications were in California, New York, Texas, Florida, and Pennsylvania, in that order, while the biggest increases were in Massachusetts, North Carolina, Illinois, Rhode Island, and Connecticut.

US inventories

The Energy Information Administration reported the withdrawal of 146 bcf of natural gas from US underground storage in the week ended Mar. 1, leaving 2.08 tcf of working gas in storage. That exceed Wall Street’s consensus for a drawdown of 131 bcf of gas. US natural gas stocks are 361 bcf below the comparable period in 2012 but 269 bcf above the 5-year average.

EIA earlier reported US commercial crude inventories jumped by 3.8 million bbl to 381.4 million bbl in the week ended Mar. 1, far exceeding Wall Street’s consensus for a mild increase of 800,000 bbl. Gasoline stocks decreased 600,000 bbl to 227.9 million bbl in the same period, less than the 1 million bbl draw analysts expected. Finished gasoline inventories declined while blending components increased last week. Distillate fuel stocks fell 3.8 million bbl to 120.4 million bbl. The market also was expecting a 1 million bbl draw in that category (OGJ Online, Mar. 6, 2013).

In Houston, analysts at Raymond James & Associates Inc. noted combined “Big Three” inventories (crude, gasoline, and distillate fuel) were down 200,000 bbl overall, far less than consensus expectations of a total draw of 1.2 million bbl. “Refinery utilization dropped from 85.1% the previous week to 82.2%. Total petroleum demand continued its rollercoaster ride, dropping 2.1% after gaining 1.5% the previous week. Cushing inventories edged up slightly to 50.8 million bbl and are up by 14.7 million bbl year-over-year. Total days of supply increased to 48.8 days, which is 0.8 days above year-ago levels,” they said.

Energy prices

The April contract for benchmark US sweet, light crudes dropped as low as $89.55/bbl Mar. 6 in early trading on the New York Mercantile Exchange before closing at $90.43/bbl, down 39¢ for the day. The May contract retreated 38¢ to $90.90/bbl. On the US spot market, WTI at Cushing matched the April futures close of $90.43/bbl.

Heating oil for April delivery continued its advance, inching up 0.26¢ to $2.98/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, gave back 2.35¢ to $3.12/gal.

The April natural gas contract dropped 5.9¢ to $3.47/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 6.1¢ to $3.57/MMbtu.

In London, the April IPE contract for North Sea Brent declined 55¢ to $111.06/bbl. Gas oil for March increased $2.25 to $927/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 65¢ to $107.64/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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