MARKET WATCH: Crude prices increase despite bearish inventory report

Crude prices increased modestly in mixed markets June 26 with the front-month contract up 0.2% in the New York futures market despite a bearish government report of US inventories.

US gasoline stocks last week escalated to the highest level for this time of the year in 2 decades, said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks tracked the crude bump,” they said, with the SIG Oil Exploration & Production Index inching up 0.2% and the Oil Service Index rising 0.4%.

In the broader markets, Raymond James analysts said, “Bad news actually calmed jitters, giving the Dow Jones Industrial Average a triple-digit boost.” Crude and market futures were trending higher in early trading June 27, but natural gas was down.

“Bouts of renewed dollar strength and concerns over Chinese banking liquidity have both been an intermittent drag on oil prices over the past few days,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. On June 26, he said, “The confluence of these forces pushed the front-month West Texas Intermediate price as low as $93.70/bbl and brought front-month Brent to as low as $100.20/bbl.”

But despite these drags, Ground said, “Both benchmarks have been able to make steady gains each day this week, which is also an indication of this week’s volatility in oil prices. Ostensibly, the reason for these gains has been that oil market participants have instead viewed this week’s encouraging data flow out of the US through a positive–for-demand lens, rather than as a negative due to increased chances of the Federal Reserve Bank tapering [its economic stimulation program]. This perhaps implies that the market has grown more comfortable with and more certain about the possibility of the Fed’s tapering and less concerned about the dampening effect this might have on speculative activity.”

Trimming back the Fed’s quantitative easing program “might also dampen the enthusiasm of the speculative market, although we feel that investor interest could be maintained if tapering is accompanied by an improving crude oil demand outlook,” he said.

Strengthening of the US dollar through the Fed’s tapering “still appears to loom large in the markets thinking, and, to our mind, rightly so,” Ground reported. “We view the dollar’s reaction (and the related reaction in interest rates) to a paring in Fed bond purchases as a major downside risk to our price forecasts over the coming quarter.”

US inventories

The Energy Information Administration reported June 27 the injection of 95 bcf of natural gas into US underground storage in the week ended June 21, exceeding Wall Street’s consensus for an increase of 89 bcf. That brought working gas in storage to 2.533 tcf, down 522 bcf from the comparable period a year ago and 31 Bcf below the 5-year average.

EIA earlier reported commercial US crude inventories remained essentially unchanged at 394.1 million bbl in the week ended June 21, still above average for the time of year. Gasoline inventories climbed 3.7 million bbl to 225.4 million bbl in the same period, well above average. Blending components increased last week while finished gasoline inventories were unchanged. Distillate fuel inventories increased 1.6 million bbl to 123.2 million bbl (OGJ Online, June 26, 2013).

Ground said, “Crude oil inventories disappointed by climbing a paltry 18,000 bbl, compared to an expectation of a 1.8 million bbl drawdown.” Gasoline stocks jumped much higher than the 900,000 bbl analysts expected.

“These disappointments appear to have been overshadowed by sustained increases in implied demand for crude oil and gasoline, as well as another rise in refinery utilization rates,” Ground said. “We are still confident that robust gasoline demand over the coming months could see a working down of both gasoline and ultimately crude oil inventories in the US. However, we do feel that market participants might still be overestimating this work-down of inventories if they simply extrapolate recent trends.”

Total petroleum inventories climbed even higher than the combined gains of crude, gasoline, and distillate fuel, “driven mainly by an uptick in residual fuel oil,” said Raymond James analysts. “Total petroleum product demand was 3% higher this week, following last week's 2.8% increase. Meanwhile, Cushing, Okla., inventories increased 700,000 bbl to 49.3 million bbl following 3 consecutive weeks of declines and are 1.8 million bbl higher than this time last year.”

Energy prices

The August contract for benchmark US sweet, light crudes rose 18¢ to $95.50/bbl June 26 on the New York Mercantile Exchange. The September contract increased 20¢ to $95.41/bbl. On the US spot market, WTI at Cushing was up 18¢ to $95.50/bbl.

Heating oil for July delivery retreated 0.41¢ to $2.85/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 0.68¢ to $2.73/gal.

The July natural gas contract regained 6¢ to $3.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued falling, down 3.9¢ to $3.73/MMbtu.

In London, the August IPE contract for North Sea Brent gained 40¢ to $101.66/bbl. Gas oil for July dropped $7.75 to $863.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 40¢ to $99.39/bbl.

Contact Sam Fletcher at samf@ogjonline.com

 

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