MARKET WATCH: Oil futures prices drop despite upside demand potential

Oil prices fell on both New York and London markets Aug. 5, and analysts expected price volatility to continue for months given upside oil demand potential amid ongoing international conflicts and unrest.

“Geopolitical tensions in Eurasia, North Africa, and the Middle East continue to place the oil markets on edge with important implications for the global economy,” Barclays Inc. analysts said in a research note.

Reductions in international supply are estimated at 3.5 million b/d total, which is “a sizeable fraction” of the market, Barclays analysts said, noting the international oil market has estimated spare capacity of 3.2%. Analysts typically like to see spare capacity at 5% for price stability.

Morgan Stanley analyst Adam Longson told the Wall Street Journal that Western sanctions against Russia increase risk for long-term supply. A series of US and European sanctions are targeted at various Russian businesses and investors following armed conflicts in Ukraine with pro-Russian separatists.

Longson also said the long-term Brent price curve has been influenced by “growing civil unrest and risks to long-run supply growth, especially Iraq.”

The Energy Information Administration reported Aug. 6 that US commercial crude oil inventories, excluding those in the Strategic Petroleum Reserve, decreased 1.8 million bbl for the week ended Aug. 1 vs. the previous week.

At 365.6 million bbl total, crude oil inventories are in the upper half of the average range for this time of year, EIA said.

Before the weekly EIA petroleum status report was released, analysts surveyed by the WSJ said they expected the US oil inventory would fall 1.7 million bbl. The oil inventory level typically drops at this time of year because refineries process high volumes before the routine maintenance season starts.

Separately, the American Petroleum Institute said its own calculations for the week ended Aug. 1 showed the inventory dropped 5.5 million bbl.

Gasoline supply drops

Total US motor gasoline inventories decreased 4.4 million bbl for the week ended Aug. 1, which EIA called the middle of the average range. Both finished gasoline inventories and blending components inventories decreased last week.

Distillate fuel inventories decreased 1.8 million bbl, which EIA described as being near the lower limit of the average range for this time of year. Propane-propylene inventories rose 1.3 million bbl last week and are near the upper limit of the average range.

US refinery inputs averaged 16.4 million b/d during the week ended Aug. 1, which EIA said was 158,000 b/d less than the previous week’s average. Refineries operated at 92.4% of capacity last week.

Gasoline production increased, averaging about 9.8 million b/d, while distillate fuel production decreased, averaging more than 4.8 million b/d.

US crude oil imports averaged 7.6 million b/d last week, down 181,000 b/d from the previous week. Over the last 4 weeks, crude oil imports averaged more than 7.5 million b/d, which EIA said was 5.3% below the same 4-week period last year.

Total motor gasoline imports, including finished gasoline and gasoline blending components, averaged 435,000 b/d for the week ended Aug. 1 while distillate fuel imports averaged 137,000 b/d.

Energy prices

The New York Mercantile Exchange September crude oil contract dropped 91¢ on Aug. 5, closing at $97.38/bbl. The October contract decreased 79¢ to $96.57/bbl.

The natural gas contract for September climbed 6.3¢ to a rounded $3.90/MMbtu. On the US cash market, gas at Henry Hub, La., was $3.85/MMbtu, up 6¢. Gas prices climbed the following weather forecasts calling for a return of seasonably warm US temperatures.

Heating oil for September delivery fell 2.43¢ to a rounded $2.85/gal. Reformulated gasoline stock for oxygenate blending for September delivery fell nearly a penny to a rounded $2.72/gal.

The September ICE contract for Brent crude delivery dropped 80¢ to $104.61/bbl. The October contract fell 73¢ to $105.25/bbl. The ICE gas oil contract for August was down $10.50 to $869.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was $102.23/bbl on Aug. 5, down 36¢.

Contract Paula Dittrick at paulad@ogjonline.com.

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