MARKET WATCH: Bearish inventories, stronger dollar drop oil prices

Commodity and equity markets took another pounding Apr. 17 with front-month crude falling 2.3% to a new low for the year in the New York futures market due to a bearish inventory report and a strengthening US dollar.

The equity market dropped amid disappointing earnings reports from companies. “The Standard & Poor’s 500 Index clawed back some lost territory in the afternoon but was unable to fully recoup losses from earlier in the day, closing down 1.4%,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks performed particularly poorly after yet another fall in crude prices, with the SIG Oil Exploration & Production Index and the Oil Service Index tumbling by 2.5% and 3.2%, respectively.”

Since Apr. 12 there has been a dramatic drop in crude and other commodity prices. “The front-month Brent crude oil price has fallen $6.58/bbl, or 6.5%, to its lowest level since July,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “While this correction has been much more than we had anticipated, we nevertheless feel that it had been imminent and is justifiable when looking at the fundamentals of the oil market.”

He noted, “Crude oil inventories, especially in the US, remain particularly high. There should be some work-down over the coming quarter as refineries ramp up production in preparation for the US driving season. However, despite there being room for increased distillate production (stockpiles are currently extremely low), gasoline inventories are currently largely in line with their seasonal 5-year average. In addition, Bakken light tight oil and Canadian oil sands production continue to escalate, especially as we move into the northern hemisphere spring (as a number of wells have been idled over the winter). This should support upward momentum in crude oil inventories.”

Ground said, “The past week has seen a dramatic reaction to the realization that the market’s global growth outlook had perhaps been too optimistic. While this may have been an overreaction which could see some upside return over the coming weeks, we feel that the potential for a return to the strength of the first quarter is highly unlikely. Perhaps also supply response from the Organization of Petroleum Exporting Countries could be forthcoming, but we doubt that Brent could push significantly and sustainably above $105/bbl again, given the absence of a demand-side catalyst.”

US inventories

The Energy Information Administration reported Apr. 18 the injection of 31 bcf of natural gas into US underground storage in the week ended Apr. 12, less than Wall Street’s consensus for a 35 bcf gain. That increased working gas in storage to 1.704 tcf, down 794 bcf from a year ago and 74 bcf below the 5-year average.

EIA earlier said commercial US crude inventories fell 1.2 million bbl to 387.6 million bbl last week, opposite Wall Street’s consensus for a 1.2 million bbl gain. Gasoline stocks declined 600,000 bbl to 221.7 million bbl, short of the 800,000 bbl drop analysts expected. Finished gasoline increased while blending components decreased. Inventories of distillate fuel jumped 2.4 million bbl to 115.2 million bbl. Analysts had projected a 400,000 bbl decline (OGJ Online, Apr. 17, 2013).

However, the overall 500,000 bbl build in ‘Big Three’ inventories of crude, gasoline, and distillate fuel combined “was in line with consensus expectations,” Raymond James analysts said. “Refinery utilization dipped slightly to 86.3% after rising last week to its highest level since November (86.8%). Cushing, Okla., inventories rose for the second week in a row to 51.1 million bbl and are currently 10 million bbl higher than this time last year. Total petroleum demand was up 1.9% [last] week after a drop of 4.5% the prior week.”

Energy prices

The May contract for benchmark US sweet, light crudes fell $2.04 to $86.68/bbl Apr. 17 on the New York Mercantile Exchange. The June contract dropped $2.06 to $86.97/bbl. On the US spot market, West Texas Intermediate at Cushing was down $2.04 to $86.68/bbl.

Heating oil for April delivery declined 7.19¢ to $2.73/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 5.28¢, also closing at a rounded $2.73/gal.

The May natural gas contract continued to climb, up 5.4¢ to $4.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., recovered most of its loss from the previous session, up 4.2¢ to $4.23/MMbtu.

In London, the June IPE contract for North Sea Brent lost $2.22 to $97.69/bbl. Gas oil for May dropped $10.50 to $825.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes was down 44¢ to $96.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com.