Iraq Crisis Drives Crude Prices, Natural Gas Declines

Edited by Vani Rao

Cooler-than-expected climate and bearish inventory pulls down natural gas

Crude Oil

The WTI crude gained 0.79%, or 85 cents a barrel, during the week ended Friday, June 20, 2014. The light, sweet crude traded between gains and losses amid a civil war-like situation in Iraq, the world’s second-largest oil exporter, and on hints of a possible interest rate hike by the Fed.

Source: Bloomberg
Source: Bloomberg

On Friday, June 20, 2014, US crude oil prices improved 35 cents, or 0.33%, to end the week at $17.26 a barrel. During the first half of the week, the WTI fell on profit taking after the crude oil surged as Iraq battled ethnic clashes and a possible hint from the US Federal about an interest rate hike in the near future.

The US Federal Reserve curtailed its monthly bond buyback program after the Federal Open Market Committee meeting on Wednesday, June 18, 2014, by $10 billion to $35 billion. This was a positive signal as it hinted that the US economy was heading on the path to recovery. However, oil prices dipped as the Fed hinted at a possible interest rate hike in the near future, hurting new investments. The Fed expects annual gross domestic product (GDP) growth rate for the US economy to range between 2.1% to 2.3%, below its previously forecasted range of 2.8% to 3.0%. The GDP growth rate has been trimmed on account of frigid conditions that had crippled economic activities across the US during winter.

The US Energy Information Administration (EIA) on Wednesday, June 4, 2014, reported that crude oil inventories fell by 0.58 million barrels to 386.3 million barrels for week ended June 14, 2014, below the Bloomberg estimated decline of 0.65 million barrels, a bearish oil inventory signal.

In another disappointing economic release, the US Commerce Department reported that new housing starts fell by 6.5% in May to 1.001 million units and new building permits issued fell by 6.4% to 991,000 units.

During the second half of the week, US standard WTI crude shed losses during the week to post some weekly gains as the Iraq crisis weighed heavily on the international crude oil supply. The Iraq crisis deepened as US President Barack Obama is sending some 300 US military personnel to Iraq to control the crisis. Iraq, until last month, was the Organization of the Petroleum Exporting Countries’ (OPEC) second-biggest oil producer after Saudi Arabia, producing around 3.5 million barrels a day.

Later during the week, the US Department of Labor reported that first-time jobless claims for the week ended May 31, 2014, has risen by 6,000 to 312,000, the lowest growth since May 2007, and below the consensus estimates of 313,00.

In the week ahead, all eyes will be on Monday’s Existing Home Sales by the US Commerce Department, followed by durable goods order and quarterly GDP growth data on Wednesday. On Friday, Reuters and the University of Michigan will announce the US consumer sentiment index for June.

On Friday, June 20, 2014, the European Standard Brent crude fell 0.22%, or 0.25 cents a barrel, to end the week at $114.81 a barrel. The ICE Futures Exchange-traded crude gained 2.11%, or $2.38 a barrel, during the week. The spread between the Brent and WTI crude widened to $7.55 a barrel.

Source: Bloomberg
Source: Bloomberg

The WTI and Brent crude were last trading at $107.24 and $115.21 a barrel, respectively, at the time of reporting.

Natural Gas

US natural gas prices for July delivery fell 4.39%, or 20.8 cents per million British Thermal Units (BTU), to settle at a four-week high of $4.531 per million BTU as the US breathed moderate climate, pointing to a decline in gas demand by power stations.

Source: Bloomberg
Source: Bloomberg

On Friday, June 20, 2014, natural gas prices fell 1.15%, or 5.3 cents per BTU. This was partly because AccuWeather Inc. predicted that seasonal temperatures for the high-consumption areas from Texas to the Northeast for June 25 through June 29 would be cooler than expected. The cooler weather will pull down the demand for electricity, easing gas demand by power producing units.

On Thursday, the EIA reported a bearish natural gas inventory report. The agency reported that the US natural gas stockpiles for the week ended June 14, 2014 increased by 113 billion cubic feet to a total of 1.719 trillion cubic feet, slightly above the Bloomberg analysts forecast of a rise of 110 billion cubic feet. In the last six consecutive weeks, natural gas stockpiles have grown by more than 100 billion cubic feet, a record streak since 1994.

In the long run, natural gas prices are set to rise further as gas-fired electricity producing units will require more gas to meet the seasonal surge in gas demand for air conditioning purposes. Natural gas prices witnessed a bullish trend during the months after the US Environmental Protection Agency cracked the whip, asking power plants to comply with its stringent carbon emission norms.

US Natural Gas was last trading at $4.533 per million BTU at the time of reporting.

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