MARKET WATCH: Doleful economic data bring down energy prices

Energy prices fell in the first day of June trading, with crude and petroleum products generally giving back gains from the previous session as reports of slowing manufacturing growth and weak jobs data fanned fears of a failing economic recovery.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 2 -- Energy prices fell in the first day of June trading, with crude and petroleum products generally giving back gains from the previous session as reports of slowing manufacturing growth and weak jobs data fanned fears of a failing economic recovery.

“Worries that fuel demand growth could weaken led to a 3% decline in oil” in the New York market, said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas fell 1% on concerns that supply gains could overwhelm demand.” Crude and the broader market were flat in early trading June 2, while the price for natural gas was “moderately higher.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said reformulated blend stock (RBOB) gasoline followed crude lower in the June 1 session, while heating oil held up “relatively better.” He said, “The term structure of West Texas Intermediate continues to weaken despite a build in Cushing, Okla., inventories reported by the American Petroleum Institute and the temporary shutdown of Keystone Pipeline” (OGJ Online, June 1, 2011).

Zhang said, “With the US and China economies showing further signs of softening, sentiment in the oil market is likely to suffer, which might keep the oil market muted for longer than thought.” He said, “Significant weakness in the job market is likely to fuel the speculation of a third round quantitative easing from the Federal Reserve Bank. While concerns over supply tightness in the oil market warrants a bullish bias in the medium term, we could see a further downside correction in oil prices in the near term as the global economy seems in a soft patch.”

The June 1 drop in the US Institute for Supply Management (ISM) manufacturing index “needs to be taken as a strong warning sign by anyone happily believing that oil can be at $130/bbl without any incidence on the economy,” warned Olivier Jakob at Petromatrix, Zug, Switzerland. The reduced ISM was accompanied by an ADP national employment index report on jobs in the private sector “that was way below any of the estimates,” he said.

In other news, Jakob noted, “Greece is downgraded further, and the European Union continues on a plan to disguise the bankruptcy of that country. The exercise was relatively easy to do for the bankruptcy of banks (organize a forced merger) but is a bit more complicated with sovereign nations. The euro remains strong, however, and the Swiss Franc is printing record highs vs. the dollar or the euro.”

Meanwhile, the North Atlantic Treaty Organization has extended its engagement in Libya to the end of September from the end of June. “We do not think that it will extend it to the fourth quarter,” said Jakob. “The initial campaign lasted longer than expected, but all the operational signs (sending the ‘bunker buster’ bombs to the Italian airfields, sending the helicopters, sending the ‘contractors’ on the field) indicate that NATO will now concentrate on finishing the job by taking [Moammar] Gadhafi physically out. Once that is done, Libya will start to command less of premium and by default reduce the Goldman Sachs theme of the Organization of Petroleum Exporting Countries running out of spare capacity.

At the pending June 8 meeting of cartel ministers, Jakob said, “It will be difficult for OPEC to make any formal adjustments to the individual quotas given the legal implications of having Libya being part of any new agreement. Any additional supply will mostly come out of Saudi Arabia, and what is relevant is not what OPEC does but what Saudi Arabia does. A few OPEC watchers are indicating an increase of Saudi production and supplies in June and, if formally confirmed by Saudi Arabia, that should be enough to counter any negative sentiment coming out of a lack of decisive formal plan from OPEC.”

US inventories
The Energy Information Administration said June 2 commercial inventories of US crude increased 2.9 million bbl to 373.8 million bbl in the week ended May 27—above average for the time of year. The Wall Street consensus was for a decline of 1.6 million bbl. Gasoline stocks rose 2.6 million bbl to 212.3 million bbl in the same period, exceeding expectations for a 900,000 bbl gain. Finished gasoline inventories decreased while blending components stocks increased. Distillate fuel stocks dropped 1 million bbl to 140.1 million bbl, exceeding analysts’ anticipation of a 300,000 bbl decrease.

The API earlier reported US crude inventories jumped by 3.5 million bbl to 371.6 million bbl last week. Gasoline stocks rose 1.5 million bbl to 212.7 million bbl, while distillate fuel fell 1.4 million bbl to 142.4 million bbl, API said.

Imports of crude into the US increased 286,000 b/d to 9.5 million b/d in that same period, EIA officials said. In the 4 weeks through May 27, crude imports averaged 9.1 million b/d, down 654,000 b/d for the comparable period in 2010. Total gasoline imports averaged 1.2 million b/d last week while distillate fuel imports averaged 123,000 b/d.

The input of crude into US refineries inched up 10,000 b/d to 14.9 million b/d last week with units operating at 86% of capacity. Gasoline production increased to 9.4 million b/d while distillate fuel production decreased slightly to 4.3 million b/d.

Energy prices
The July and August contracts for benchmark US light, sweet crudes both lost $2.41/bbl June 1, closing at $100.29/bbl and $100.86/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing also was down $2.41 to $100.29/bbl in lock-step with the July futures contract price.

Heating oil for July delivery declined 4.43¢ to $3.01/gal on NYMEX. RBOB for the same month lost 7.3¢ to $2.98/gal.

The July natural gas contract dropped 3.7¢ to $4.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.6¢, also closing at a rounded $4.63/MMbtu.

In London, the July IPE contract for North Sea Brent crude retreated $2.20 to $114.53/bbl. Gas oil for June decreased $2.75 to $959.25/tonne.

The Vienna headquarters for OPEC was closed June 2, and no update on its average basket price was available.

Contact Sam Fletcher at samf@ogjonline.com.

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