MARKET WATCH: Energy prices continue to decline

Energy prices continued to slip July 1 after the Energy Information Administration under the Department of Energy reported larger than expected increases in US stocks of gasoline and distillate fuels.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 2 -- Energy prices continued to slip July 1 after the Energy Information Administration under the Department of Energy reported larger than expected increases in US stocks of gasoline and distillate fuels.

An industry report that the US lost 473,000 jobs in June and talk that China may favor a new reserve currency triggered a small decline in the value of the US dollar while pumping up gold as a hedge.

On July 2, the US Department of Labor reported nonfarm payrolls were down by 467,000 in June, compared with a 325,000 decline economists had forecast. That was on top of 322,000 jobs lost in May. The unemployment rate increased to 9.5% in June from 9.4% in May.

Reuters news service said July 1 oil production among members of the Organization of Petroleum Exporting Countries was up in June with increases among several members offsetting increased loss of Nigerian production due to militant attacks. Reuters’ survey showed production from the 11 OPEC members other than Iraq, rose to 26.02 million b/d in June from 25.91 million b/d. That put OPEC members at 72% compliance with their earlier pledge to reduce production by 4.2 million b/d to 24.84 million b/d. Compliance was at 81% in April and March but has eroded as oil prices improved in recent months.

EIA reported commercial US crude inventories fell 3.7 million bbl to 350.2 million bbl in the week ended June 26. That exceeded Wall Street expectations of a 2 million bbl draw but was less than the whopping 5.9 million bbl decline projected by the American Petroleum Institute. Just a week ahead of the peak demand period over the July 4 Independence Day holiday in the US, total gasoline inventories jumped by 2.3 million bbl to 211.2 million bbl. Distillate fuel inventories increased by 2.9 million bbl to 155 million bbl (OGJ Online, July 1, 2009).

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, “Two weeks ago the gasoline crack suffered heavy pressure when the DOE showed a greater build than the API as the DOE was realigning towards the stock levels of the API. The same pattern occurred yesterday where the DOE showed much greater product stock builds than the API in a move to fully align the DOE stock levels to the API numbers. Hence we are in a situation where the API and the DOE fully agree now on the absolute stock levels of crude, gasoline, and heating oil, but according to the API, there was last week a stock build of only 900,000 bbl in gasoline and heating oil while according to the DOE the build was of 5.2 million bbl.”

Jakob said, “Given that the demand number is an implied number based on the stock change, this divergence-convergence between the API and the DOE is making it hard to have a proper demand picture on a weekly basis since part of the reported stock change from 1 week to the other is a statistical readjustment either on the API or on the DOE side.” He said, “Bulls can choose to read the weekly stock change in the API report; bears to read the weekly change in the DOE. It provides great intraday trading opportunities but does not help the flat price to break from its trading range.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “Crude erased its early gains after DOE weekly inventory data showed that the US continues to build gasoline and distillate inventories, indicating that demand for refined products in the US remains weak.” They said, “Oil fell in response to the inventory data despite the weaker dollar and evidence that Chinese manufacturing continues to show signs of recovery. Oil has traded in a $4 range around $70/bbl for the past 3 weeks, but in the same 3 weeks the Exploration & Production Sector Index and the Oil Service Sector Index have both dropped 16%.”

In Houston, analysts with Raymond James & Associates Inc. said energy corporate stocks showed mixed results July 1 but were down in premarket trading July 2 “following a neutral DOE report.” They said, “In general, we recommend investing cautiously in the energy space, given that a significant pullback in natural gas prices remains highly likely late this summer while crude could also see weakness in the near term. It's hard to imagine that just 1 year ago, the front month crude and natural gas prices closed at 52-week highs of $145.29/bbl and $13.58/MMbtu respectively. The US stock market will be closed tomorrow, so expect things to be slow today.”

Energy prices
The August contract for benchmark US sweet, light crudes traded at $68.52-71.85/bbl July 1 on the New York Mercantile Exchange, before closing at $69.31/bbl, down 58¢ for the day. The September contract lost 57¢ to $70.27/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 58¢ to $69.31/bbl. Heating oil for August delivery declined 2.2¢ to $1.77/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dropped 4.3¢ to $1.86/gal.

The August natural gas contract continued to drop on NYMEX, down 4¢ to $3.80/MMbtu. On the US spot market, gas at Henry Hub, La., fell 6.5¢ to $3.65/MMbtu. EIA reported the injection of 70 bcf of natural gas into US storage in the week ended June 26. That brought the amount of working gas in storage to 2.72 tcf, up by 615 bcf from year ago levels and 467 bcf above the 5-year average.

In London, the August IPE contract for North Sea Brent crude was down 51¢ to $68.79/bbl. July gas oil was unchanged at $557/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 30¢ to $69.26/bbl.

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