MARKET WATCH: Bearish inventory, economy drop oil prices

Oil prices dropped sharply May 1 with the front-month crude contract down 2.6% in the New York futures market after federal officials reported oil inventories at the highest level since 1982.

In addition, Marc Ground at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil markets were hammered by disappointing data flow out of China, losing considerable ground.” North Sea Brent closed just below $110/bbl, narrowing the price spread between Brent and West Texas Intermediate to “a relatively tight” $8.92/bbl.

In Houston, analysts at Raymond James & Associates Inc. said, “Broader markets fell after several disappointing economic data points, sending all 10 sectors in the Standard & Poor’s 500 Index lower. The headlines included a weak private jobs report and Chinese manufacturing data.”

Federal Reserve Chairman Ben Bernanke “granted little relief to investors after it was announced, again, that monthly monetary easing would continue for now,” they said. Natural gas was down modestly, and the SIG Oil Exploration & Production Index and the Oil Service Index declined 2% and 1%, respectively.

Bernanke reiterated the Fed will keep its key short-term interest rate near zero until US unemployment falls to 6.5% or inflation exceeds 2.5% a year. It also will continue its quantitative easing policy that has already injected $2.5 trillion into the economy since December 2008. The Labor Department said May 2 the unemployment rate is unchanged at 7.6%.

US inventories

The Energy Information Administration reported the injection of 43 bcf of natural gas into US underground storage in the week ended Apr. 26, far above Wall Street’s consensus for an addition of 29 bcf. That raised working gas in storage to 1.777 tcf, which is 795 bcf below the year-ago level and 118 bcf below the 5-year average.

EIA earlier said commercial US crude inventories jumped 6.7 million bbl to 395.3 million bbl last week, well above Wall Street‘s consensus for an increase of 1.1 million bbl. Gasoline stocks dropped 1.8 million bbl to 216 million bbl, surpassing the 900,000 decline analysts expected. Both finished gasoline and blending components were down. Distillate fuel inventories were up 500,000 bbl to 115.8 million bbl, above market projections of a 300,000 bbl rise (OGJ Online, May 1, 2013).

“The disparity between a crude oil build and a gasoline drawdown [pulled] the market in opposing directions,” Ground said. “While the drop in gasoline stocks is an encouraging sign, we are still concerned that both the level of current gasoline stocks and in terms of days of supply are still above their 5-year averages; this could imply a limit on the extent to which refineries will draw down crude oil stocks to bolster gasoline inventories.”

Raymond James analyst noted, “The increase in ‘Big Three’ inventories of 5.4 million bbl was far larger than the consensus forecast for a build of 500,000 bbl” as “higher imports and lower demand outweighed better refinery utilization.” They said, “Total petroleum inventories built even more given the increases in jet fuel, residual fuel oil, and unfinished oils.”

However, Ground said, “At least Cushing, Okla., inventories continue to be worked down (1.4 million bbl this past week), although the pace of this work-down has been rather erratic.”

Energy prices

The June contract for benchmark US sweet, light crudes dropped $2.43 to $91.03/bbl May 1 on the New York Mercantile Exchange. The July contract fell $2.44 to $9124/bbl.

On the US spot market, WTI at Cushing also was down $2.43 to $91.03/bbl.

The new front-month June contract for heating oil decreased 5.07¢ to $2.79/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 8.27¢ to $2.72/gal.

The June natural gas contract was down 1.7¢ to $4.33/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 3.8¢ to $4.32/MMbtu.

In London, the June IPE contract for North Sea Brent lost $2.42 to $99.95/bbl. Gas oil for May fell $23 to $822.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes retreated 68¢ to $99.97/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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