MARKET WATCH: Energy prices fall as economy weakens

Energy prices continued to decline with the front-month crude contract down 0.5% May 17 in the New York market, undercut by lackluster economic data and fear the financial recovery may be slowing.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 18 -- Energy prices continued to decline with the front-month crude contract down 0.5% May 17 in the New York market, undercut by lackluster economic data and fear the financial recovery may be slowing.

“The broader market fell modestly following reports of a slowdown in industrial production and housing starts,” said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas fell more than 3%.” Prices for both crude and gas were up in early trading May 18, however.

With the front-month North Sea Brent contract hovering above its 100-day moving average at just under $110/bbl, “a break below this level could see Brent move towards the $106/bbl level,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group. “On the upside the contract seems capped at $112.89/bbl—it’s 10-day moving average,” he said. “While we do believe Brent is likely to hold its 100-day moving average, we note that the risk of a break lower has increased substantially.”

Meanwhile, the Brent term-structure continues to weaken, he said.

Crude recently has maintained a high correlation with the value of the US dollar, said De Wet. “At the same time the reformulated blend stock (RBOB) front-month contract price also remains under pressure. Similar to Brent, the contract price is hovering above its 100-day moving average,” De Wet reported.

Olivier Jakob at Petromatrix, Zug, Switzerland, reiterated his earlier warning that US refiners eventually “will have to explain to all sorts of taskforces and other investigation committees why they are running at very low utilization rates (OGJ Online, May 11, 2011).” And he noted some Democrat Senators yesterday called on the Federal Trade Commission to investigate why US refineries are running at low capacity. “This is in our opinion only the first salvo and will be followed by investigation requests into the levels of gasoline and diesel exports by US refineries,” he said.

However, Jakob reported, “There is not enough oil demand in the US for US refineries to run at current low levels of capacity utilization without high product exports; running at the levels of previous years would be even worse. If US refiners were to run at normal historical levels and reduce the exports of diesel and gasoline, the US domestic product prices would collapse, the processing margins would plunge, and US refineries would be importing less crude oil. Those are the price risks if the US political system is able to put enough pressure on the US refining system to produce at higher levels or limit the amount of product exports.”

He said, “The gasoline crack has lost $12.50/bbl (June RBOB crack to West Texas Intermediate) since last Tuesday, and while we were bearish the gasoline crack at the closing value of last Tuesday, given the correction seen since then and the narrowing of the RBOB spread to heating oil we have now to move to a neutral view on the gasoline relative values.”

US inventories
The Energy Information Administration said May 18 commercial US crude inventories were unchanged at 370.3 million bbl in the week ended May 13, despite a Wall Street consensus for an increase of 1.7 million bbl. Gasoline stocks inched up by 100,000 bbl to 205.9 million bbl in the same period, far short of analysts’ expectations of a 1 million bbl increase. Finished gasoline inventories decreased while blending components inventories increased. Distillate fuel inventories fell 1.2 million bbl to 143.1 million bbl vs. an outlook for a 300,000 bbl increase.

The American Petroleum Institute earlier reported a rise of 2.7 million bbl in crude stocks to 369.9 million bbl in the same week, with gasoline inventories down 676,000 bbl to 208.8 million bbl and distillate fuel stocks dropping 2.8 million bbl to 144.6 million bbl.

Imports of crude into the US declined by 394,000 b/d to just under 8.6 million b/d last week. In the 4 weeks through May 13, US crude imports averaged 8.9 million b/d, down by 868,000 b/d from the comparable period last year. Total gasoline imports last week averaged 862,000 b/d while distillate fuel imports averaged 112,000 b/d.

The input of crude into US refineries increased 239,000 b/d to 14.3 million b/d last week with units operating at 83.2% of capacity. Gasoline production increased to 9.1 million b/d. Distillate fuel production decreased to 4 million b/d.

Energy prices
The June contract for benchmark US sweet, light crudes dropped 46¢ to $96.91/bbl May 17 on the New York Mercantile Exchange. The July contract fell 42¢ to $97.43/bbl. On the US spot market, WTI at Cushing, Okla., was down 46¢ to $96.91/bbl.

Heating oil for June delivery declined 2.93¢ to $2.85/gal on NYMEX. RBOB for the same month fell 11.8¢ to $2.92/gal.

The June natural gas contract was down 13.6¢ to $4.18/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 5¢ to $4.20/MMbtu.

In London, the July IPE contract for North Sea Brent crude dropped 85¢ to $109.99/bbl. Gas oil for June fell $33.50 to $890.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $1.19 to $106.60/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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