MARKET WATCH: Uncertain economy pulls down oil prices

Crude prices continued falling but at a faster pace May 22, down 2% in the New York futures market on disappointing inventories, a stronger dollar, and lackluster progress in the US economy.

In testimony before Congress, Federal Reserve Chairman Ben Bernanke said it is too soon to change policy with the job market still weak and unemployment still too high at 7.5%, despite moderate economic growth. “Despite talk of cutting back on Fed monetary accommodation, there was not any particularly strong statement that the health of the US economy was improving,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

Broader markets also closed lower because of mixed signals regarding the Fed’s economy stimulus program. “Energy stocks followed suit, with the SIG Oil Exploration & Production Index and the Oil Service Index falling 1.5% and 2%, respectively, feeling the weight of a crude selloff,” said analysts in the Houston office of Raymond James & Associates Inc.

Oil prices were down in early trading May 23 with the overnight release of disappointing Flash Purchasing Managers Index data for China, which slipped below the 50 threshold indicating contraction. Ground said, “The potential for significant upside in Chinese economic activity is compressed. This, taken together with an ample supply picture, in our view tempers oil’s potential for upside, even when taking into consideration strengthening US demand.”

US inventories

The Energy Information Administration reported May 23 the injection of 89 bcf of natural gas into US underground storage in the week ended May 17, well below Wall Street’s consensus for 92 bcf input. It increased working gas in storage to 2.053 tcf, down 680 bcf from year-ago level and 84 bcf below the 5-year average.

EIA earlier reported commercial US crude inventories declined 300,000 bbl to 394.6 million bbl last week, short of the Wall Street consensus for a 1 million bbl draw. Gasoline stocks jumped by 3 million bbl to 220.7 million bbl in the same period, compared with analysts’ expectations of a 300,000 bbl decrease. Both finished gasoline inventories and blending components increased. Distillate fuel inventories fell 1.1 million bbl to 118.8 million bbl, opposite the market outlook for a 1 million bbl build (OGJ Online, May 22, 2013).

“‘Big Three’ inventories had a large build (whereas a draw was expected), driven by gasoline inventories,” Raymond James analysts said. “Despite the build in gasoline inventories, gasoline demand rebound by 5.4% from [the previous] week, while distillate demand was up 18%.” Total petroleum imports were 10.4 million b/d, up from 9.6 million b/d the previous week. The US refinery utilization rate dipped to 87.3% from 88% previously.

Crude inventory at Cushing, Okla., continued rising, up 400,000 bbl last week. “Most disappointing,” Ground said, was the “massive build” in gasoline inventories, “even higher than the previous week’s build.” He said, “Both the level of current gasoline stocks and in terms of days of supply are still well above their 5-year averages—this could imply a limit on the extent to which refineries will drawdown crude oil stocks to bolster gasoline inventories.”

Energy prices

The new front-month July contract for benchmark US sweet, light crudes fell $1.90 to $94.28/bbl May 22 on the New York Mercantile Exchange. The August contract dropped $1.86 to $94.46/bbl. On the US spot market, West Texas Intermediate at Cushing was down $1.88 to match the front-month futures closing of $94.28/bbl.

Heating oil for June delivery decreased 5.54¢ to $2.87/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 2.64¢ to $2.82/gal.

The June natural gas contract dipped 0.6¢ but closed essentially unchanged at a rounded $4.19/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2¢ to $4.16/MMbtu.

In London, the July IPE contract for North Sea Brent lost $1.31 to $102.60/bbl. Gas oil for June fell $9 to $866.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.03 to $100.36/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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