MARKET WATCH: Crude slips lower on bearish inventory report

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 22 -- The price of the new front-month June crude contract slipped lower Apr. 21 in the New York market after a Department of Energy agency issued a bearish report of bigger-than-expected increases in US oil inventories.

“Prices dropped after the Energy Information Administration reported that supplies surged as imports climbed to the highest level since September,” said analysts at Pritchard Capital Partners LLC in New Orleans. “Oil also dropped as the dollar strengthened against the euro as the cost to insure Greece’s debt against default surged to a record.”

The front-month natural gas price also slipped lower as “the worst-performing energy commodity for the day.” Analysts in the Houston office of Raymond James & Associates Inc. said energy stocks underperformed the broader market with service stocks down nearly 1% and E&P stocks falling moderately.

Oil inventories
The Energy Information Administration said commercial US crude inventories increased 1.9 million bbl to 355.9 million bbl in the week ended Apr. 16. The consensus among Wall Street traders was for an 800,000 bbl decrease. Gasoline stocks jumped by 3.6 million bbl to 224.9 million bbl in the same period, outstripping an expected increase of 500,000 bbl. Distillate fuel inventories were up 2.1 million bbl to 148.9 million bbl, more than twice the expected increase of 1 million bbl (OGJ Online, Apr. 21, 2010).

It was “the largest weekly stock build in 47 weeks,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Over the last 4 weeks, total US stocks have built by 21 million bbl (a daily building rate of 750,000 b/d). Stocks of crude and clean petroleum products (CPP) have built by 8 million bbl during the week, and they are just 2 million bbl shy of the multiyear high seen last year. US stocks of crude and CPP are 97 million bbl higher than in the same 2008 week [and] 85 million bbl higher than the same 2007 week.”

Jakob said, “The US petroleum supply system has rarely been as comfortable as today and the growth of Chinese demand vs. a year ago has not changed anything because there is enough spare capacity in the global system to answer any demand increase from the West or from the East.”

Stocks of crude continued to build in Cushing, Okla., and are close to the historical highs. “But they are also building in the other regions of the Midwest,” said Jakob. “Storage capacity has been increased in Cushing, hence we should not yet be at squeeze economics, but with the current contango we should expect that the stock building in Cushing will continue.”

Meanwhile, he said, “Gasoline retail prices have climbed back to levels that started to trigger some demand reaction in 2007 and with unemployment still not reversed, consumer confidence worse than expected, we still find it adventurous to believe that the US consumer will continue to fill up on $90/bbl crude oil.”

Jakob said, “The problem for gasoline is that on one side there is the risk of demand reaction on the higher oil prices and on the other hand there is also a supply reaction as refiners and blenders are maximizing the output of gasoline as there is not enough demand for distillates to clear the high inventories of that product. On the 4-week average, US crude oil runs are flat to the levels of 2008, but gasoline production is 400,000 b/d higher, making for lower requirements on imports.”

As for distillates, Jakob said, “Nothing has really changed. We are in the seasonal stock building cycle but starting from a multiyear-high base, and this will start to haunt the US refiners before the end of the year.” He said, “Overall, still no sign of stress in the US supply system. Refinery runs are higher than a year ago, but crude supplies are up and the pull from the higher runs is not enough to force crude oil out of storage tanks. To the contrary the contango economics are now an incentive to hold even more stock of crude and products.”

Natural gas
On Apr. 22, the EIA reported the injection of 73 bcf of natural gas into US underground storage in the week ended Apr. 16. That was below the Wall Street consensus for a 79 bcf injection but brought working gas in storage above 1.8 tcf. That’s 95 bcf higher than in the comparable period a year ago and 286 bcf above the 5-year average.

Raymond James analysts said, “As we get into the summer injection season, the market continues to loosen, indicated by our expectation to see an increase in the year-over-year storage surplus.”

Gas prices remain relatively flat “despite concerns of rising production as buying support from fuel consumers has been keeping prices around $4[/MMbtu], said Pritchard Capital Partners. “Despite the continued softness in prices, we are yet to see any significant pull back in drilling activity, and this has been causing concern in the market,” they said.

In other news, international economists at Chatham House, home of the Royal Institute of International Affairs in London, said the ash fallout from the erupting Eyjafjallajoekull volcano in Iceland “may have dashed hopes of a recovery” of the European economy this year and could make its debt crisis worse.

“After a week of disruption, some estimates put the cost to the airlines alone at almost $2 billion. Impacts elsewhere in the European economy from airline disruption, knock-on effects, and the prolonged delay before stranded passengers can be rescued and business gets back to normal, all suggest that total business losses during April could easily mount to $5-10 billion, even assuming no further travel disruptions. This could shave 0.1-0.2% off second-quarter GDP for the EU, probably knocking growth back to zero and further delaying recovery,” said Chatham House analysts.

They said, “The worst impacts of closed air space would be felt in Northern Europe and those tourism destinations most dependent on air passengers from Northern Europe, such as the Mediterranean. For example, tourism accounts for 15-20% of gross domestic product in Greece, and a hit from fewer visitors would worsen what is an already dire economic situation.”

Energy prices
The June contract for benchmark US sweet, light crudes traded at $82.68-84.64/bbl Apr. 21 on the New York Mercantile Exchange before closing at $83.68/bbl, down 17¢ for the day. The July contract increased 38¢ to $85.68/bbl. On the US spot market, West Texas Intermediate at Cushing was down 57¢ to $82.88/bbl. Heating oil for May delivery increased 2.56¢ to $2.21/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.18¢ but closed essentially unchanged at $2.28/gal.

The May natural gas contract lost 2¢ to $3.96/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., increased 3.5¢ to $3.97/MMbtu.

In London, the June IPE contract for North Sea Brent crude gained 90¢ to $85.70/bbl, still at an unusual premium to the NYMEX benchmark crude position. Gas oil for May gained 25¢ to $700.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes rose 18¢ to $82.01/bbl.

Contact Sam Fletcher at [email protected].