Energy

Return to Article

Crude Oil Pummeled Again

Chuck Marvin

The energy space got crushed for the second consecutive day Wednesday as bearish oil inventory figures, falling demand for oil and its derivative products, and worries about a slowing economy eliminated all remnants of optimism in energy futures and equities markets.

West Texas crude futures for August delivery dropped $4.14 to $134.60 at the New York Mercantile Exchange, and Brent crude lost $3.52 to settle at $138.75. Reformulated gasoline slid 8 cents to $3.28 a gallon, while heating oil mustered a fractional gain to close at $3.84 a gallon.

Near-term natural gas fell 8 cents to $11.40 per million British thermal units.

August WTI treaded water near the $139-a-barrel level through the overnight trading sessions in Asia and Europe, wounded by its record-breaking free fall of $10.50 incurred Tuesday morning.

However, new oil inventory data released at 10:30 a.m. Wednesday by the Energy Information Administration showing surprisingly large builds in crude and gasoline stores sent oil traders scurrying to reverse their remaining net-long positions, and August WTI collapsed $7 in less than 15 minutes.

The EIA figures showed that commercial crude inventories grew by 2.95 million barrels during the week ending July 11. Analysts were expecting a draw of 2.2 million barrels, according to a Bloomberg analyst survey. Motor gasoline stocks jumped 2.47 million barrels vs. analyst forecasts for an 800,000 barrel draw, and distillate inventories increased by 3.2 million barrels -- 1.2 million barrels more than analysts were expecting.

Total petroleum stocks including crude oil and all petroleum products grew by 7.5 million barrels - the largest weekly increase since June 2007.

Commercial crude inventories excluding the strategic petroleum reserve now lie at 296 million barrels. While this is below the five-year average, it is almost exactly in line with average inventory levels before Hurricane Katrina knocked out a large chunk of domestic refinery capacity in August 2005.

Motor gasoline stores are currently in the middle of the average range for this time of year, and distillate fuel stocks are now above the five-year average range for this time of year.

The sub-300 million barrel crude inventory number has been relentlessly used by oil traders and analysts to argue that oil supplies in the U.S. are "tight" and therefore undervalued.

However, Jim Williams, energy economist at WTRG Economics, says that the figure is actually being misused as a measure of the supply/demand equilibrium.

"It seems like anybody [who] talks about crude oil these days [is] putting their understanding of economics on hold," Williams said in an interview. "Crude oil acts like any other product in any other market. If a company's feedstock prices are high, that company will maintain the minimum level of that feedstock in inventory to satisfy their customers' demand. Oil is a primary feedstock for a huge swath of the U.S. economy. That is why crude oil inventories are low now -- not because of an immediate oil shortage."

Once Wednesday trading on the Nymex ceased and the smoke cleared, August WTI had fallen 7.3% from its Monday settlement price -- an enormous two-day move for West Texas crude, even within the context of the maniacally volatile price trajectory that the contract has followed during the last two years.

Meanwhile, energy stocks are getting hammered by falling oil prices in Tuesday's trading session. In after-hours trading on the New York Stock Exchange, ConocoPhillips(COP Quote) was losing 1.9% to $83.19; Chevron (CVX Quote) was down 3.4% to $86.39; Royal Dutch Shell (RDS.A Quote) was down 1.9% at $72.68; and Exxon Mobil (XOM Quote) was off 1.7% at $80.81.

U.S. Oil Fund(USO Quote), an exchange-traded fund that closely tracks the performance of WTI futures contracts on the Nymex, was down 2.8% at $109.25.