Crude drops again

Prices drop as crude stockpiles rise more than expected

Crude oil prices ended lower at Nymex on Wednesday, 12 May 2010. More than expected build up in crude inventories for last week as reported by the energy department affected prices today. Long-term implications of the European Union's rescue package and its impact on the currencies, specially on the euro, also bothered investors and raised question about global demand for oil in coming months.

On Wednesday, crude-oil futures for light sweet crude for June delivery closed at $75.65/barrel (lower by $0.72 or 0.9%). For the month of April, crude rose 2.8%. For the first quarter of this year, crude rose by 5.5%. Year to date, crude is higher by 0.8%.

Prices are very much lower as compared to 3 July, 2008 settlement of $145.29 a barrel and an intraday high of $147.27 on 11 July, 2008, an all-time high. However, oil has also gained nearly 143% from a December 2008 nadir. That day prices settled at $33.87 a barrel following an intraday low of $32.40.

In the latest weekly inventory report, the EIA reported today an increase of 1.95 million barrels in the nation's oil inventories for last week, slightly above expectations. The biggest surprise was a decrease in gasoline inventories by 2.8 million barrels, whereas market was expecting a small increase. Stockpiles of distillates, which include diesel and heating oil, rose by 1.4 million barrels. The refinery utilization rate dropped more than expected to 88.4%. Meanwhile, inventories at Cushing, Okla., the delivery point for Nymex futures, rose by 784,000 barrels to a record high on 37 million barrels.

A decision by the European Union and International Monetary Fund leaders to pledge financial support to the eurozone brought about a wave of buying and short covering that caused the stock markets across globe to surge in its best single-session percentage gain in more than a year on Monday, 10 May. As per plan, countries in the eurozone that face financial uncertainty will be eligible to receive some 500 billion euros from the EU and another 250 billion euros from the IMF. In addition to those measures, the European Central Bank will buy eurozone bonds from the secondary market and the Federal Reserve has reactivated swap lines with foreign institutions. At least for the time being, those efforts have eased contagion concerns that have surrounded Greece for weeks.

But traders mulled over the fact today that in the long term how much financial aid will be pledged for euro zone countries that face tenuous fiscal conditions and also the issue of how those funds will be allocated efficiently and whether recipients can remedy their underlying problems. The long-term implication of this on the euro and worries about inflation also bothered investors.

In the currency market today, the euro dropped once again against the dollar. The euro has slipped 10.6% against the dollar this year. The dollar index, which measures the strength of the dollar against a basket of six other currencies rose by 0.4%.

The International Energy Agency today lowered by 220,000 barrels a day its forecast for global oil demand for 2010. Oil demand is estimated to grow from 2009 by 1.9%, equating to 1.6 million barrels a day, to 86.4 million barrels a day.

In contrast, yesterday, the U.S. Energy Information Agency raised its outlook for global oil demand to 1.6 million barrels per day in 2010, slightly higher than the 1.5 million barrels-a-day projection made last month. Separately, The Organization of the Petroleum Exporting Countries had also said on Tuesday it was raising its estimate for global oil demand for 2010. OPEC expects global oil demand to grow by 950,000 barrels a day to 85.38 million barrels a day. It previously expected growth of 900,000 barrels a day.

Among other energy products on Wednesday, reformulated gasoline for June delivery, the most active contract, added 2 cents, or 0.7%, to settle at $2.2104 a gallon.

Crude ended FY 2009 higher by 78%, the highest yearly gain since 1999. It reached a high of $82 earlier in October 2009 and hit a low of $33.98 on 12 February 2009. Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.

At the MCX, crude oil for May delivery closed lower by Rs 70 (2%) at Rs 3,390/barrel. Natural gas for May delivery closed at Rs 193, higher by Rs 5.6 (2.95%).