MARKET WATCH: Oil prices tumble in third straight session

Oil prices continued to tumble Apr. 12 for the third consecutive session in the New York market with the front-month crude down 3% amid market fears high energy prices will destroy energy demand.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 13 -- Oil prices continued to tumble Apr. 12 for the third consecutive session in the New York market with the front-month crude down 3% amid market fears high energy prices will destroy energy demand.

That was “exacerbated by media reports that the Saudis were lowering production due to weak demand,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas fell modestly as weather reports provided some support, preventing further declines.” The broader equity market fell 1%, “dragged down by energy stocks,” they said.

The recent decline in oil prices “appears to be an overdue correction after price gains for 7 days in a row. The market fundamentals continue to tighten, while oil prices continue to be supported by geopolitical tensions, loosening of monetary policy, and a reasonably robust US economic recovery,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

In the Apr. 12 trading session, he reported, “Oil products largely tracked crude oil, with reformulated blend stock for oxygenate blending (RBOB) showing more resilience than distillates. The term structure for West Texas Intermediate and North Sea Brent also weakened on the day, and ICE gas oil term structure moved swiftly into contango for the summer months shortly after the April contract expired yesterday.”

Zhang noted recent signs of demand destruction in the US, “in terms of gasoline and distillate demand.” He said, “The nature of demand destruction tends to be gradual, compared to the abrupt nature of supply disruptions. However, this does not suggest the market will move in a gradual and orderly fashion in response to any demand decline.”

He said, “The very sharp downward moves in oil prices are likely to be partly driven by exits of speculative length, which stood at all-time highs as of [Apr. 5].”

The International Energy Agency (IEA) in Paris, the Energy Information Administration (EIA) under the US Department of Energy in Washington, DC, and the Organization of Petroleum Exporting Countries all published their respective monthly oil reports.

“All three organizations warned about oil demand destruction due to high oil prices,” Zhang noted. “OPEC revised down its demand growth forecast marginally lower by 50,000 b/d to 1.39 million b/d. Meanwhile, IEA maintained its previous demand growth forecast of 1.4 million b/d. Despite the expected demand destruction, the big picture remains the same, which is a continuous tightening of the supply and demand fundamentals in the oil market.”

Zhang said, “The market is likely to be in a correction mode for now while waiting for the DOE inventory report later today. We expect a build in crude but draws in gasoline and distillate inventories. More importantly, we will be looking for signs of demand destruction in the report.”

The Goldman Sachs Group Inc. reiterated its recent recommendation that traders exit long positions in crude, “giving this time a target of $105/bbl on Brent,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “It would be a sharp fall from current levels, but we are not even sure that it would do much to stop demand erosion. Brent at $105/bbl is the level that was trading before the crisis in Libya, and it includes a lot of quantitative easing incentives [paid by the Federal Reserve System] and still some significant geopolitical premium (before Libya the markets were already pricing the possibility of the revolutions extending to Algeria, Saudi Arabia…).

Jakob said, “One of the main upside price risk for the next 30 days will come from the delta hedging requirements from the sellers of calls on the large layers of option open interest in the June contract. That would accelerate on a WTI break of $120/bbl. June WTI was trading at $114/bbl just before Goldman Sachs issued its sell recommendation in crude oil; the price set-back that followed will be a relief for the institution(s) that sold those calls.”

Despite lower oil prices, the US dollar continues to lose value against the euro. “With the Brent premium to WTI increasing while the euro is increasing, it will not result in much savings for the European driver but will become a greater challenge for the European exports and the German motor that is pulling a longer train of bailed-out European economies,” Jakob said.

US inventories
EIA said Apr. 13 commercial US inventories of crude increased 1.6 million bbl to 359.3 million bbl in the week ended Apr. 8, exceeding the Wall Street consensus for a 1 million bbl build. Gasoline stocks fell 7 million bbl to 209.7 million bbl, EIA officials said, far outstripping analysts’ expectations of a 1 million bbl drop. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 2.7 million bbl to 150.8 million bbl, counter to the market’s anticipation of a 500,000 bbl increase.

The American Petroleum Institute earlier reported US crude stocks were up 1.2 million bbl to 355.5 million bbl in that same week. It showed gasoline inventories down 4.6 million bbl to 214.5 million bbl, while distillate fuel stocks fell 3.7 million bbl to 150.2 million bbl.

EIA reported crude imports into the US fell by 379,000 b/d to 8.6 million b/d last week. In the 4 weeks through Apr. 8 US crude imports averaged 8.9 million b/d, down 316,000 b/d from the comparable period in 2010. Gasoline imports averaged 889,000 b/d last week while distillate fuel imports averaged 101,000 b/d.

The input of crude into US refineries dropped 354,000 b/d to 14 million b/d during the week with units operating at 81.4% of capacity. Gasoline production increased to 9 million b/d, but distillate fuel production decreased to 4.1 million b/d.

Energy prices
The May contract for benchmark US light, sweet crudes traded at $105.47-110.24/bbl Apr. 12 on the New York Mercantile Exchange before closing at $106.25/bbl, down $3.67 for the day. The June contract dropped $3.60 to $106.97/bbl. Subsequent monthly contacts also posted losses through June 2012 and beyond. On the US spot market, West Texas Intermediate at Cushing, Okla., tracked the front-month crude futures contract, down $3.67 to $106.25/bbl.

Heating oil for May delivery fell 7.99¢ to $3.17/gal on NYMEX. RBOB for the same month declined 3.64¢ to $3.16/gal.

The May natural gas contract dropped 1¢ to $4.10/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 4.2¢, also to $4.10/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost $3.06 to $120.92/bbl. Gas oil for April was unchanged at $1,050.50/tonne.

The average price for OPEC’s basket of 12 reference crudes fell $2.75 to $117.55/bbl.

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