Sam Fletcher
OGJ Senior Writer
HOUSTON, July 22 -- Crude oil prices climbed for the third consecutive session July 21, with the new front-month September contract temporarily topping $100/bbl during intraday trading in the New York market.
“Oil benefited from improved risk appetite following the latest bail-out plan for Greece,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Reformulated blend stock for oxygenate blending (RBOB) and heating oil both closed lower, resulting in lower cracks. Term structures for both West Texas Intermediate and North Sea Brent were firmer following the inventory draw [of crude] at Cushing, Okla., [in the week ended July 15] and the International Energy Agency’s decision not to sell any more oil (OGJ Online, July 21, 2011).”
Zhang said, “The oil market breathed a sigh of relief yesterday after the IEA’s decision not to sell more oil from the reserves of its member countries. The decision came as no surprise as, in our view, it is still too early to see the impact of the 60 million bbl [of oil and refined product] put up for sale at the end of June. Given the sluggish economy in many of the IEA’s member countries and still heated oil prices, it remains a real probability that the IEA will release more oil this year.”
He said, “We believe that the oil flat price remains supported by strong investment demand and abundant dollar liquidity, while refining margins are likely to come under pressure from high refinery runs and soft demand.”
The recovery of refining margins since the beginning of July seems the result of the IEA’s release of emergency oil supplies, said Zhang. Although oil prices weakened immediately after IEA’s decision, they have “more than recovered” over the last 3 weeks. “Therefore, final demand for oil products is unlikely to have been boosted by the oil price dip, which spanned only for a very short period of time. On a 4-week average basis, US total implied gasoline demand hit a 4-year low last week, while implied distillate demand remained below last year’s seasonal level.”
He said, “The hefty build in production inventories is also due to sluggish demand for oil products. With the sluggish oil product demand and high refinery run rate, we expect refining margins to come under pressure before the autumn maintenance season starts in September. Major upside risks for refining margins appear limited only to a risk of hurricanes if they hit the Gulf of Mexico refineries.”
The 30 million bbl of crude sold from the US Strategic Petroleum Reserve will begin showing up in next week’s inventory statistics report. “Given that the computers are programmed to buy on draws and sell on builds, it will be interesting to see how the algorithm machines digest the SPR releases in the next few weeks,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Unless they are turned-off, the flat price risk on Wednesdays will be to the downside. The report of Aug. 11 will be particularly interesting given that there will be 8 million bbl delivered in the first week of August.”
As US Gulf Coast refineries begin receiving SPR barrels, Jakob said, “One thing that the region will not need is pressure on refining margins. Yesterday, the gasoline crack was under pressure, and it will be something to monitor, since a combination of lower refining margins and SPR deliveries will not be a good mix. Brent is in a very shallow backwardation and WTI in a shallow contango. WTI is miles away from its super-contango structure; hence on a time-spread differential we still do not see the justification for Brent trading at a $19/bbl premium to WTI. That premium was reduced yesterday by more than $1/bbl.”
In Europe, the latest Amsterdam, Rotterdam, and Antwerp (ARA) petroleum product inventories declined by 232,000 tonnes from the previous week. “Seemingly, the inventory decline across most production has provided support to European refining margins,” Zhang reported. “Singapore middle-distillate inventories remained at a new seasonal high, despite a decline, while light-distillate inventories are at 5-year average level. Looking across oil product stocks across the US, Europe, and Asia, we believe that the gasoline crack will stay strong for the rest of summer.”
Jakob noted, “Analysis of the new European Union rescue plan [for Greece] will be the topic du jour. It is basically a roll-over of bond maturities to infinity, still with the possibility of selective default, and in a sense the entire periphery risks are being taken over by Germany and France, given that the EU will now be buying the debt of periphery states in difficulty. It saves the day as long as the German taxpayers are happy to take over the debt of the rest of Europe.”
The euro is receiving “some very strong support” as a result of the EU deal. However, Jakob said, “If the new EU deal reduces some of the systemic risk, we do not think that it does anything to economic growth and therefore on a fundamental basis we do not view it as helping oil demand per se.”
In other news, the US weekly initial jobless claims totaled 418,000, “implying little improvement in the US job market,” Zhang said. “In contrast, the Philadelphia Federal Reserve Bank survey on manufacturing and the US leading indicators show economic expansion—but at a sluggish pace.”
Energy prices
The September contract for benchmark US light, sweet crudes climbed as high as $100.16/bbl in intraday trading July 21 on the New York Mercantile Exchange, before closing at $99.13/bbl, up 73¢ for the day. The October contract increased 68¢ to $99.46/bbl. On the US spot market, WTI at Cushing was up 79¢ to $98.93/bbl as it tried to get in step with the new front-month futures contract price.
Heating oil for August delivery declined 1.92¢ to $3.10/gal on NYMEX, however. RBOB for the same month dropped 4.75¢, also to a rounded $3.10/gal.
The August natural gas contract fell 10.5¢ to $4.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 2¢ to $4.56/MMbtu.
In London, the September IPE contract for North Sea Brent crude lost 64¢ to $117.51/bbl, after trading at $116.62-119.25 during the session. Gas oil for August continued climbing, up $5.50 to $983.25/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 34¢ to $113.20/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
