MARKET WATCH: Crude makes small gains; products, gas prices continue slipping

Crude prices made small gains on a weaker dollar July 25 with the front-month US benchmark contract up 0.1% in the New York futures market, but petroleum products and natural gas prices continued to retreat.

“Natural gas futures declined 1.5% as traders weighed a lower injection number against cooler temperatures forecast in the coming weeks,” said analysts in the Houston office of Raymond James & Associates Inc. Energy stocks were mixed with the Oil Service Index losing 0.4% and the SIG Oil Exploration & Production Index gaining 1.6%. Crude and gas commodities prices were lower in early trading July 26.

The Energy Information Administration reported the injection of 41 bcf of natural gas into US underground storage in the week ended July 19, less than Wall Street’s consensus for an addition of 46 bcf. That raised working gas in storage to 2.786 tcf, down 399 bcf from the comparable period in 2012 and 46 bcf below the 5-year average (OGJ Online, July 25, 2013).

Raymond James analysts said, “Excluding weather-related demand, there was 1.4 bcfd of additional natural gas added to storage [last] week compared with last year, and we have averaged 3.2 bcfd looser over the past 4 weeks.”

WTI-Brent spread

The price spread between North Sea Brent and West Texas Intermediate benchmark crudes rapidly narrowed last week with WTI briefly trading at a premium to Brent in the July 19 and July 22 sessions. It has widened some this week but is still at a historic low.

The recent contraction was “the final push in a persistent narrowing of the spread since December” primarily due to the strengthening of WTI, said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. From its low point in December, front-month WTI has climbed 22.9% while front-month Brent remained largely unchanged.

Amid lackluster demand and growing domestic production, crude inventories at Cushing, Okla., the delivery point for WTI contracts, rose steadily through 2012, becoming “a constant drag on WTI prices,” Ground said. But by mid-December, prices began to retreat with the expanded Seaway Pipeline scheduled to open in January, transporting more oil from the Cushing bottleneck to Gulf Coast refineries. This started the steady climb of WTI prices and consequently the narrowing of the Brent-WTI spread.

After the pipeline opened, initial work down of Cushing crude stocks was “rather lackluster.” However, Ground said, “On the approach of the US driving season, the pace of drawdowns intensified amid increased refinery runs. This pushed WTI ever higher, as market participants grew increasingly optimistic about the US consumer and the outlook for gasoline demand, bringing us to this point where the spread is at its lowest level since early-2010.”

Nonetheless, he said, “We remain skeptical that the spread can continue to narrow and doubt the sustainably of a nearly closed spread.”

He said, “While recent consumer confidence readings do point to a much stronger consumer, we must be aware of the dependence of these readings on gasoline prices and the self-limiting dynamic between demand and prices. Part of the strength in consumer confidence since April is owed to the step lower in gasoline prices during that month. As gasoline demand grows, this will invariably put upward pressure on prices (although, as we have already mentioned, this might be limited by ample gasoline inventories), dampening consumer confidence and crimping gasoline demand. In addition, recent economic data flow has also pointed to a slowing down of consumer spending.”

Meanwhile US crude production has resumed its previous upward trend, possibly putting a brake on declines in US crude oil inventory. “Therefore, to the extent that recent buoyancy in WTI relative to Brent reflects an extrapolation of recent trends in consumer and inventory data (and the inference drawn from this about US gasoline demand over the US driving season), we feel that such buoyancy may be overdone,” Ground concluded.

Energy prices

The September contract for benchmark US light, sweet crudes regained 10¢ to $105.49/bbl July 25 on the New York Mercantile Exchange. The October contract recovered 37¢ to $104.47/bbl. On the US spot market, WTI at Cushing, Okla., remained in step with the front-month futures contract, up 10¢ to $105.49/bbl.

Heating oil for August delivery declined 1.2¢ to $3.04/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.78¢ to $3.02/gal.

The August natural gas contract dropped 5.4¢ to $3.64/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5.5¢ to $3.65/MMbtu.

In London, the September IPE contract for North Sea Brent took back 46¢ to $107.65/bbl. Gas oil for August lost 50¢ to $913.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes continued its decline, down 16¢ to $105.28/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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