MARKET WATCH: High crude inventory, weak market indicators bring down oil prices

Energy prices continued dropping May 31 with the front-month crude futures contract down 1.5% in the New York market following a larger-than-expected inventory increase.

“Natural gas was flat on the day, but the Energy Information Administration estimated that March demand for the commodity fell 5.4% year-over-year due to unusually mild weather in the first quarter,” said analysts in the Houston office of Raymond James & Associates Inc. The Dow Jones Industrial Average dipped 0.2% to conclude “its worse month in 2 years,” down a net 6.2% in May. “The Standard & Poor’s 500 Index fared similarly,” Raymond James analysts reported.

They said, “A slew of economic data pointed to a weakening employment picture and lackluster economic growth here in the US. Initial jobless claims rose more than expected last week, while the private sector added fewer jobs than expected. Also, the US economy grew at a slower pace than expected in the first quarter of this year.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, blamed disappointing US jobs data, the latest China Purchasing Manager Index survey showing a near halt in manufacturing, and the “ongoing woes of the Euro-zone debt crisis” for undermining oil prices. “Oil products followed crude down, as the sell-off took place across the board,” he said. “The time spreads in Brent also declined further, while the front-end of the West Texas Intermediate curve held firm as the market anticipates that the reversal of the Seaway Pipeline will alleviate the glut at Cushing, Okla.”

Zhang said, “For now, the market is focusing on the Euro-zone crisis, in particular, the developments in Greece and Spain. However, data from the US and China have been downbeat recently, which added to the bearish sentiment.”

US inventories

EIA reported US crude inventories increased by 2.2 million bbl to 348.7 million bbl in the week ended May 25, above the Wall Street consensus for a 1 million bbl increase. It marked the 10th consecutive week of crude inventory gains. Gasoline stocks decreased 800,000 bbl to 200.2 million bbl, less than the expected 1 million bbl draw. Finished gasoline stocks decreased while blending components remained unchanged. Distillate fuel inventories fell 1.7 million bbl to 117.8 million bbl last week; analysts had expected distillate stocks to remain unchanged.

The Department of Energy agency also reported the injection of 71 bcf of natural gas into US underground storage in the week ended May 25, matching Wall Street’s consensus. That brought working gas in storage to 2.815 tcf, up 732 bcf from the same period a year ago and 724 bcf above the 5-year average (OGJ Online, May 31, 2012).

Crude imports increased 473,000 b/d last week, contributing to the inventory build. “Gasoline and distillate inventories fell, coinciding with a 3.5% and 7% week-over-week increase in gasoline and distillate demand, respectively,” said Raymond James analysts. “The refinery utilization rate ticked up a percentage point to 89.1% as driving season has officially begun. Overall petroleum demand was down 1.9% week-over-week and is down 2.6% compared to the same period last year.” Crude inventories at the key Cushing storage site continued to rise, but only marginally. This was the first EIA inventory report to reflect the reversal of Seaway Pipeline to move crude from Cushing to the Gulf Coast.

Energy prices

The July and August contracts for benchmark US light, sweet crudes each dropped $1.29 to $86.53/bbl and $86.85/bbl, respectively, May 31 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing was down $1.29 to $86.53/bbl in step with the front-month futures contract

The expiring June contract for heating oil fell 3.36¢ to $2.71/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 3.32¢ to $2.83/gal.

The July natural gas contract inched up 0.4¢ but closed essentially unchanged at a rounded $2.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 6.5¢ to $2.33/MMbtu.

In London, the July IPE contract for North Sea Brent was down $1.60 to $101.87/bbl. Gas oil for June dropped $11.75 to $870.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.69 to $101.06/bbl.

Contact Sam Fletcher at samf@ogjonline.com.