MARKET WATCH: Oil prices decline as risk premium eases

Oil prices generally retreated May 7 with front-month crude ending a three-session rally in the New York market as Middle East conflict failed to heat up.

“Absence of an escalation of Middle East tensions has seen the geopolitical risk premium ease off,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. He reiterated, “Unless significant oil producers are drawn into a conflict, any geopolitical-induced buoyancy should fade as the uncertainty subsides.”

In Houston, analysts with Raymond James & Associates Inc. reported, “Crude had a choppy session but ultimately ended the day down 0.6% on oversupply concerns while gas continued its week-long slide, falling 2.3%.” However, the SIG Oil Exploration & Production Index and the Oil Service Index followed the broader markets higher, gaining 2.4% and 2.1, respectively.

On the demand front, Ground said, “The [May 7] release of the Energy Information Administration’s monthly Short-Term Energy Outlook shows a downward revision of forecast Organization for Economic Cooperation and Development demand for 2013, while non-OECD demand forecasts have been largely unchanged. Notably, the EIA has not made any revision to its forecast of Chinese demand (10.68 million b/d). We are still concerned that China’s growth prospects, and consequently oil demand, might still disappoint, although given last month’s dramatic fall in oil prices much of this might already be factored into prices. Amid a generally good set of Chinese trade numbers (which might bolster investor optimism about China’s economy), net exports of crude oil also resumed their upward trajectory in April (3.6% year-over-year, compared with declines of 7.7% and 2.4% in February and March, respectively). We still would not get overly optimistic about Chinese oil demand as year-to-date oil import growth has averaged only 2.1% year-over-year compared with 7.8% over the same period last year.”

EIA’s supply forecasts were lowered slightly “with a upward revision in forecast US supply more than outweighed by downward revisions to North Sea and supply from the Organization of Petroleum Exporting Countries,” Ground said. “It would appear as though the EIA is forecasting that OPEC will cut production in response to the recent drop off in oil prices and reevaluation of global demand.”

US inventories

EIA said May 8 commercial US benchmark crude inventories inched up a minimal 200,000 bbl to 395.5 million bbl in the week ended May 3—just a fraction of Wall Street’s consensus for a 2 million bbl increase—following a 6.7 million bbl jump the previous week. Gasoline stocks decreased 900,000 bbl to 215.1 million bbl, exceeding analysts’ expectations of a 500,000 bbl decline. Finished gasoline inventories decreased while blending components increased last week. US inventories of distillate fuel climbed 1.8 million bbl to 117.6 million bbl; the market anticipated only a 500,000 bbl gain.

Imports of crude into the US dropped 560,000 b/d to 7.6 million b/d last week. In the 4 weeks through May 3, crude imports averaged 7.7 million b/d, down 1.1 million b/d from the comparable period a year ago. Gasoline imports last week averaged 780,000 b/d while distillate fuel imports averaged 223,000 b/d.

The input of crude into US refineries increased 470,000 b/d to 15.2 million b/d last week with units operating at 87% of capacity. Gasoline production decreased to 8.7 million b/d, and distillate fuel production increased to 4.5 million b/d.

Energy prices

The June contract for benchmark US light, sweet crudes lost 54¢ to $95.62/bbl May 7 on the New York Mercantile Exchange. The July contract dropped 53¢ to $95.86/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., followed the front-month futures contract down 54¢ to $95.62/bbl.

Heating oil for June delivery inched up 0.75¢ to $2.93/gal on NYMEX. However, reformulated stock for oxygenate blending for the same month declined 3.23¢ to $2.83/gal.

The June natural gas contract fell 9.1¢ to $3.92/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 4.5¢ to $3.88/MMbtu.

In London, the June IPE contract for North Sea Brent was down $1.06 to $104.40/bbl. Gas oil for May increased $9.75 to $868.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes gained 14¢ to $102.75/bbl.

Contact Sam Fletcher at samf@ogjonline.com.