MARKET WATCH: Crude prices 'tepid' despite large drop in crude inventory

The front-month crude contract gained a modest 0.5% June 5 on the New York market while North Sea Brent retreated in London despite a government report of the biggest drop in US crude inventory in months. Front-month natural gas made a minimal gain.

In the equity market, the Dow Jones Industrial Average “took a cool 200-point plunge yesterday, posting a 1.4% loss that rippled across all sectors,” said analysts in the Houston office of Raymond James & Associates Inc. “Weak private jobs and factory orders piled onto international worries, and investors seemed content with waiting until [the June 7] jobs report to decide whether or not to put money to work.”

The Energy Information Administration said commercial US crude inventories fell 6.3 million bbl to 391.3 million last week, which included the Memorial Day holiday. That was far below Wall Street’s expectation of a modest decline of 800,000 bbl. Yet crude stocks remain above average for this time of year, officials said. Gasoline inventories decreased 400,000 bbl to 218.8 million bbl, opposite analysts’ consensus for a 1 million bbl increase. Finished gasoline stocks rose while blending components declined. Distillate fuel inventories climbed 2.6 million bbl to 123.3 million bbl, outstripping the market’s outlook for a 1.4 million bbl gain (OGJ Online, June 5, 2013).

“This is the largest drawdown [of crude] we’ve seen since the end of last year,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “Keeping in mind that yearend inventory movements are largely motivated by avoidance of inventory taxes rather than as a result of demand, this makes it the strongest demand-related inventory drawdown since the end of August last year.” Cushing, Okla., inventories were down 500,000 bbl last week.

The “relatively tepid price response” to the latest numbers was most likely the result of traders’ uncertainty about economic data to be reported later this week, Ground said.

“On the product [inventory] front, the picture was not as inspiring, although not devastating either,” Ground said. He previously was skeptical a large drawdown of crude was possible in the face of high product inventories, particularly gasoline. However, he said, “With the current low retail gasoline price in the US (which reflect these high levels of gasoline inventory) and the apparent resilience of the US consumer, we are now less skeptical and feel that developments here warrant attention, as this may prove to be less of a constraint to West Texas Intermediate upside than we had originally thought.”

Combined “Big Three” inventories of crude, gasoline, and diesel fuel were down 4 million bbl overall last week. Draws in jet fuel, residual fuel, and unfinished oils produced a 7 million bbl decline in total petroleum stockpiles.

“The large draw in crude came amid lower crude imports (down 500,000 b/d for the week), with total petroleum demand up 2.7% and refinery utilization at a 19-week high of 88.4% going into the US driving season,” Raymond James analysts said. “Though weekly production data is not always the most reliable, we would note that domestic crude production exceeded imports last week for the first time in 16 years.”

In other news, Raymond James analysts cited a report in the Toronto-based Globe & Mail that the Canadian Association of Petroleum Producers raised its long-term outlook for Canada’s oil sands production, indicating the backlog of large pipeline projects (Keystone XL, Trans Mountain, Northern Gateway, etc.) may be insufficient to handle future volumes. “Of course, with large pipeline projects facing significant regulatory pressure, many think that producers could continue to turn to rail to ship crude to market,” the analysts said.

EIA reported June 6 the injection of 111 bcf of natural gas into US underground storage last week, exceeding Wall Street’s consensus of 100 bcf. That increased working gas in storage to 2.252 tcf, down 616 bcf from the comparable period a year ago and 69 bcf below the 5-year average.

Energy prices

The July contract for benchmark US sweet, light crudes rose 43¢ to $93.74/bbl June 5 on the New York Mercantile Exchange. The August contract gained 41¢ to $93.96/bbl. On the US spot market, WTI at Cushing was up 43¢ to $93.74/bbl.

Heating oil for July delivery dipped 0.95¢ but closed essentially unchanged at a rounded $2.86/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, inched up 0.3¢ with its closing price also unchanged, at a rounded $2.82/gal.

The July natural gas contract advanced just 0.3¢, producing another unchanged closing price at a rounded $4/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 4.4¢ to $3.96/MMbtu.

In London, the July IPE contract for Brent was down 20¢ to $103.04/bbl. Gas oil for June escalated by $13.25 to $871/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes climbed $1.22 to $101.09/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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