MARKET WATCH: Crude price continues to fall; gas up 3.7%

Front-month crude prices fell May 12 for the second consecutive session in the New York market after government officials reported a larger than expected build in inventories, especially at the key storage and exchange point in Cushing, Okla.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 13 -- Front-month crude prices fell May 12 for the second consecutive session in the New York market after government officials reported a larger than expected build in inventories, especially at the key storage and exchange point in Cushing, Okla.

The front-month natural gas contract jumped by 3.7% with traders expecting a smaller injection report on May 13 because of strong cash demand.

“The crude inventories gained for the 14th time in past 15 weeks, taking stockpiles to the highest level since the week ended May 29, 2009, and 6.1% above the 5-year average,” said analysts at Pritchard Capital Partners LLC in New Orleans. “A downward revision in global oil demand by the International Energy Agency [in Paris] did not help crude’s case either. The IEA lowered its projection for global oil demand by 220,000 b/d to 86.4 million b/d and reduced its estimate of the call on the Organization of Petroleum Exporting Countries crude by 400,000 b/d to 28.7 million b/d.”

In early trading May 13, West Texas Intermediate continued to stretch its price differential to North Sea Brent crude to a $5.65/bbl discount, said analysts in the Houston office of Raymond James & Associates Inc. “More importantly, the front month contract for WTI is currently trading in contango of over $4.60/bbl as overcapacity at Cushing, the WTI price point, continues to be a major issue,” they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The main price dynamics in recent weeks have been the widening of the contango and with it the stocks in Cushing continue to increase. The June to July spread as we approach the final week of trading can become extremely volatile, but with the widening of the contango moving as we expected to the July to August WTI spread, the economics are there to keep the stocks in Cushing.” He said, “The economics proper to Cushing and to WTI continue, however, to create a two-tier market, where the US Gulf Coast differentials are surging to higher premiums to offset the value implosion of WTI at Cushing.”

US inventories
The Energy Information Administration reported commercial inventories of US crudes gained 1.9 million bbl to 362.5 million bbl in the week ended May 7. Gasoline stocks fell 2.8 million bbl to 222.1 million bbl in the same week. Distillate fuel inventories increased 1.4 million bbl to 153.8 million bbl, slightly higher than the anticipated 1.2 million bbl increase (OGJ Online, May 12, 2010).

Jakob noted US refineries are running at a relative high rate—significantly higher than a year ago, especially on the US Gulf Coast. “But since the growth of crude oil supplies is greater than the growth of product demand, this does not result globally in any reduction of the visible stocks,” he said.

Some of the higher refinery runs on the gulf coast are to produce distillates for exports, but the stock levels of heating oil continue to rise “and are ahead of the curve for the season,” Jakob said. “At the current pace, by early July the US should have its stock levels of heating oil already at a more-than-adequate level for the next winter, and this will hurt the refining margins as soon as we start to exit the peak of the gasoline season.”

EIA subsequently reported the injection of 94 bcf of natural gas into US underground storage in the week ended May 7. That pushed working gas in storage above 2 tcf, up 97 bcf in the comparable period a year ago and 325 bcf above the 5-year average.

The Wall Street consensus was for a 102 bcf injection. “We believe that an injection lower than that will help the prices cross resistance around $4.30[/MMbtu],” said Pritchard Capital Partners prior to the EIA report. They said, “The signs of strengthening economic recovery are providing additional support to [gas] prices, as the US imports climbed by 3.1% in March, signaling higher economic activity, which is expected to result in higher natural gas demand from the industrial sector.”

Energy prices
The June contract for benchmark US light, sweet crudes dropped 72¢ to $75.65/bbl May 12 on the New York Mercantile Exchange. However, the July contract declined only 7¢ to $80.15/bbl while subsequent months posted gains. On the US spot market, WTI at Cushing was down 72¢ to $75.65/bbl. Heating oil for June delivery gained 1.9¢ to $2.16/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.52¢ to $2.21/gal.

The June natural gas contract jumped 15.3¢ to $4.28/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $4.20/MMbtu.

“Gas prices have now rallied 40¢ from [May 6] lows,” said Raymond James analysts. However, they said, “As we experience warmer weather and continue to run over 900 gas rigs, we expect the market to continue to loosen as we head into summer.”

In London, the June IPE contract for North Sea Brent crude advanced 71¢ to $81.20/bbl, widening its premium over WTI. Gas oil for May was unchanged at $677.25/tonne.

OPEC’s Vienna headquarters were closed May 13, and no price report was available.

Contact Sam Fletcher at samf@ogjonline.com.

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