MARKET WATCH: Crude prices surge in New York market on bullish inventory report

Oil prices escalated July 10 with front-month crude up 2.9% in the New York futures market following a bullish government report of an unexpected surge in commercial US inventory last week.

“Oil rose on both sides of the Atlantic despite news that Chinese imports of crude declined to their lowest level in 9 months,” said analysts in the Houston office of Raymond James & Associates Inc. North Sea Brent inched up 0.4% “on higher demand forecasts made by the Organization of Petroleum Exporting Countries, dropping the West Texas Intermediate-Brent spread to less than $3, its lowest level since 2010.”

Meanwhile, the benchmark 10-year Treasury note yield dropped to 2.59% July 10 from 2.63% as reassured investors began buying bonds after Federal Reserve Chairman Ben Bernanke said the central bank will continue its economic stimulus program. The equity market racked up some record highs in early trading July 11, with all 10 industry groups on the rise in Standard & Poor's 500 Index.

Market outlook

The US boom in tight oil production is reducing demand for OPEC crude and stimulating a steady increase in spare capacity over the next few years, “increasing the oil market’s ability to absorb supply shocks and undermining the group’s influence over market balances and price,” said Barclays Capital Commodities Research analysts. But as long as global demand maintains a modest seasonal upswing, OPEC in the second half of this year will not have to cut production much from recent levels of 30.5 million b/d, they said.

Barclays Capital analysts have reduced their Brent price forecast to $105/bbl in the fourth quarter from a previous estimate of $114/bbl. “Although we caution against overestimating the impact of US tight oil in bringing down global oil prices and still expect long-term averages to remain comfortably above $100/bbl,” they said, “the extra supply now looks likely to cap oil price upside further ahead, and we have cut roughly $20/bbl from our 2014 and 2015 forecasts, which for Brent now stand at $110[/bbl] and $115[/bbl] respectively.”

Moreover, they said, “We have also revised up our forecasts for WTI relative to Brent. The market has recently priced in both better US Midwest refinery demand and expanding pipeline capacity to shift US crude to Gulf Coast refineries. We now think the Brent-WTI differential will fluctuate around the $4-5/bbl level until yearend, though we expect conditions to support a modest ‘rewidening’ of the spread in 2014.”

US inventories

The Energy Information Administration reported July 11 the injection of 82 bcf of natural gas into US underground storage in the week ended July 5, in line with the Wall Street consensus. This increased working gas in storage to 2.687 tcf, down 443 bcf from the comparable period a year ago and 22 bcf below the 5-year average.

EIA earlier said commercial US crude inventories fell 9.9 million bbl to 373.9 million bbl last week, which included the US Independence Day holiday. That far exceeded Wall Street’s consensus for a 3.2 million bbl draw. Gasoline stocks dropped 2.6 million bbl to 221 million bbl in the same period, opposite market expectations of a 1 million bbl build. Inventories of finished gasoline increased while blending components decreased. Distillate fuel inventories jumped 3 million bbl to 123.8 million bbl last week, well above the anticipated 1 million bbl increase in that category.

“Crude inventories have fallen by 20.2 million bbl in the [previous] 2 weeks. The decline in total petroleum inventories was even larger than the decrease in the ‘Big Three’ [of crude, gasoline, and distillates] at 11.5 million bbl, with jet fuel, residual fuel oil, and unfinished oil inventories all declining week-over-week,” Raymond James analysts said. “However, it’s worth noting that total inventories are still up by 21 million bbl (2.4%) from year-ago levels. The large crude drawdown came amid continuing high refinery utilization (92.4%), while crude imports were flattish at 7.5 million b/d. Despite the draw, total petroleum demand was 1.2 million b/d (5.7%) lower [last] week, following [the previous] week’s 7.5% increase. Cushing, Okla., inventories decreased after 2 weeks of increases, declining 2.7 million bbl to 47 million bbl.

Energy prices

The August contract for benchmark US sweet, light crudes jumped $2.99 to $106.52/bbl July 10 on the New York Mercantile Exchange. The September contract escalated $2.31 to $105.62/bbl. On the US spot market, WTI at Cushing kept in step with the August futures contract, up $2.99 to $106.52/bbl.

Heating oil for August delivery increased 1.6¢ to $3/gal on NYMEX. Reformulated stock for oxygenate blending for the same month pulled ahead by 8.89¢ to $3.01/gal.

The August natural gas contract reclaimed 2.3¢ to $3.68/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.7¢ to $3.70/MMbtu.

In London, the August IPE contract for Brent advanced 70¢ to $108.51/bbl. Gas oil for July regained $4.50 to $913.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes rose 63¢ to $104.69 bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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