MARKET WATCH: Crude oil prices climb higher

Oil prices continued climbing July 20 with crude up 1% after what some analysts described as a bullish government report of a decline in US commercial inventories on the last day of trading for the August crude contract in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 21 -- Oil prices continued climbing July 20 with crude up 1% after what some analysts described as a bullish government report of a decline in US commercial inventories on the last day of trading for the August crude contract in the New York market.

In Houston, however, analysts at Raymond James & Associates Inc. reported natural gas fell 1% ahead of the latest government report on gas inventory. Raymond James said crude gave up some of its earlier gains in early trading July 21 while gas was trading higher. “Broader market futures are in the green following France and Germany's late-night compromise on a bailout plan for Greece,” they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Distillate cracks remained resilient despite of a large build in US distillate stocks. The term structure of West Texas Intermediate strengthened slightly after a 1 million bbl draw of crude inventories at Cushing, Okla.”

US inventories
The Energy Information Administration reported July 21 the injection of 60 bcf of natural gas into US underground storage in the week ended July 15, slightly below the Wall Street consensus for a 62 bcf addition. That put working gas in storage above 2.67 tcf, but 213 bcf less than last year at this time and 59 bcf below the 5-year average.

EIA earlier said commercial US crude inventories fell 3.7 million bbl to 351.7 million bbl in the week ended July 15. That exceeded the Wall Street consensus of a 2 million bbl drop. Gasoline stocks increased 800,000 bbl to 212.5 million bbl, counter to analysts’ expectation of a 300,000 bbl decline. Both finished gasoline inventories and blending components inventories gained last week. Distillate fuel stocks escalated by 3.4 million bbl to 148.5 million bbl, more than doubling the 1.5 million bbl gain anticipated by analysts.

Imports of crude into the US increased by 343,000 b/d to 9.3 million b/d last week. In the 4 weeks through July 15, crude imports averaged just under 9.3 million b/d, down 269,000 b/d from the comparable period a year ago. Total motor gasoline imports last week averaged 881,000 b/d. Distillate fuel imports last week averaged 92,000 b/d.

The input of crude into US refineries increased 403,000 b/d to 15.6 million b/d in the week ended July 15 with units operating at 90.3% of capacity. Gasoline production increased to 9.2 million b/d. Distillate fuel production increased to 4.6 million b/d.

“Despite a bullish draw in crude inventories and a 1 million bbl draw at Cushing, a larger-than-expected build in distillates and an unexpected build in gasoline gave this week's report a bearish tilt,” Raymond James analysts said. “Demand rebounded modestly from dismal numbers last week as total petroleum demand rose 1.8% sequentially. However, total petroleum demand remains down 1.7% year-over-year on a 4-week moving average basis. Of note, refinery utilization breached the 90% mark for the first time this year, coinciding with new highs for the New York market’s 3-2-1 crack spread resulting from the robust Brent-WTI spread. Boosted by the bullish draws in crude inventories, crude prices ended the day modestly higher.”

Crude sold this month from the US Strategic Petroleum Reserve is “not yet showing in the statistics but should start to show up either in the report of next week or the following one,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “When including the SPR barrels that have been sold, the total US stocks are at parity to a year ago and since the stocks last year were at a multiyear high, it is still very difficult to portray the US supply picture as tight. When considering only the stocks of crude and clean petroleum products, the US is at par to the levels of 2009 and at par to the levels of 2010 when including the SPR barrels.”

The US Gulf Coast had a crude stock draw of 3.4 million bbl. “But that cannot be a case of concern when the region will receive 30 million bbl of sweet SPR crude oil between now and the end of August,” said Jakob.

Overall, the EIA report depicts “a well-supplied US market, but trending even more well supplied as crude oil stocks are being transformed into product stocks while the resulting crude oil stock draws are soon to be refilled with volumes coming out of the strategic reserves,” Jakob said.

He noted, “Refinery runs were higher during the week and given that demand is not high enough, this resulted in crude oil stocks being transformed into product stocks. With the restart of the PBF refinery, the refinery runs on the East Coast reached levels not seen since 2009.” PBF Energy Co. LLC 's 182,200 b/d refinery in Delaware City, Del., was reported "substantially up and running" late last week. PBF began restarting the refinery in May. It was shut by previous owner Valero Energy Corp. in November 2009 because it was losing $1 million/day. PBF purchased the refinery last year.

Midwest refinery runs “recovered strongly with an increase of 322,000 b/d” for the week, said Zhang. “Total US refinery gross inputs hit 16 million b/d for the first time since August last year, and total refinery crude inputs reached the highest level for more than 3 years. The high total refining run rate is likely to last till end of August when the season maintenance season starts. The high throughput contributed to the hefty build in production inventories, in conjunction with sluggish demand.”

Meanwhile, Zhang said, “The Eurozone debt crisis remains the biggest immediate concern in the market. The market seems unconvinced with the apparent joint agreement between Germany and France, as the euro weakened this morning. We believe that the EU summit meeting might present yet another short-term solution but leave the debt crisis unsolved.”

In other news, Zhang said, “The latest manufacturing Purchasing Managers Index (PMI) data from China and that of the main Eurozone economies continue to show weakness in the global economy. We remain bearish on refining margins and the WTI term structure, while favoring long flat price positions at market dips on the back of strong investment demand and abundant dollar liquidity.”

IEA’s market assessment
The Paris-based International Energy Agency (IEA) reported July 21 it completed its 30-day review of the Libya Collective Action launched June 23 to release 30 million bbl of light, sweet crude and 30 million bbl of petroleum product from emergency stockpiles of member countries. Despite widespread criticism of that action as a political move to lower energy prices, IEA officials concluded it “served a market need by adding liquidity and bridging the gap to additional supplies” from the Organization of Petroleum Exporting Countries.

However, they said, “A number of uncertainties remain which demand vigilance, notably the duration of the Libyan disruption, the future evolution of OPEC supply as well as the final impact of the stock release itself; much of the oil is only now entering the physical market.” They said, “IEA stands ready to augment the Libya Collective Action if market conditions again warrant. While we are not now seeking the release of additional stocks, the action is not yet complete as stocks are still entering the market.”

They claimed, “Market appetite for the government stocks made available has been greater than during the Hurricane Katrina collective action in 2005, and the measure has largely achieved its aims to date.” However, some analysts maintained much of the crude sold out of the SPR was priced lower than the previously announced minimum.

Zhang reported the IEA’s executive director said it’s unlikely the IEA will implement an additional reserve release for now on the expectation that Saudi would raise crude production to 10 million b/d this month. However, Zhang said, IEA’s “increased willingness to intervene…represents another significant risk to the market.”

Energy prices
The August contract for benchmark US sweet, light crudes climbed 64¢ to $98.14/bbl July 20 on the New York Mercantile Exchange. The September contract increased 54¢ to $98.40/bbl. On the US spot market, WTI at Cushing was up 64¢ to $98.14/bbl.

Heating oil for August delivery rose 2.04¢ to $3.12/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 3.21¢ to $3.15/gal.

The August contract for natural gas lost 3.3¢ to $4.50/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.2¢ to $4.58/MMbtu.

In London, the September IPE contract for North Sea Brent gained $1.09 to $118.15/bbl. Gas oil for August increased $1.75 to $977.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes was up 86¢ to $113.54/bbl.

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