Oil Prices Inch up as Inventories Plunge; Futures Expiry Lowers Gas Prices

Edited by Vani Rao

US crude stock at Cushing falls by 1.1 million barrels

Crude Oil

On Wednesday, 26 February 2014, US crude prices rallied after the release of crucial economic data that indicated a drop in inventory levels at the Cushing, Oklahoma delivery hub for the sixth week in a row. The US Energy Information Administration (EIA) stated that crude stocks at Cushing fell by 1.1 million barrels. Moreover, overall crude stocks in the US rose by just 68,000 barrels in the past week, well below the expected level of 1,275,000 barrels, according to median estimates of 10 economists at Bloomberg.

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The inventory levels fell by 12% since January to less than 35 million barrels following the introduction of a new pipeline from Cushing to the Gulf Coast refineries. The inventory level in Cushing is currently below its five-year average. The crude at Gulf Coast refineries are mainly used to meet overseas demand.

Over the past few weeks, the US has been battling sever climatic conditions, pushing up the demand for oil to warm homes and businesses. There seems to be no immediate respite to the cold wave in the US as the Commodity Weather Group LLC has predicted temperatures of 15 degrees Fahrenheit or more (below average) from Montana to western New York through March 1, 2014.

A severe winter across much of the US has boosted demand for crude, which can be refined to produce heating oil to warm homes and businesses. The sharp spike in demand has resulted in oil prices climbing to a four-month high last week.

The light, sweet crude rose nearly a percent or $1.02 per barrel on the New York Mercantile Exchange (NYMX), hitting the day’s high of $102.85. The global Brent crude contract rose 44 cents to $109.95 a barrel on the ICE Futures Europe exchange.

The spread between the Brent and WTI crude has narrowed to $6.93 per barrel, the lowest in the last five months, as seen in the graph.

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The EIA reported that oil refineries were operating at 88% capacity, indicating an increased demand for oil. This report comes at the time when refineries cut down their operations for seasonal maintenance. The refining rate of one million barrels per day is higher than the five-year average.

Moreover, the political unrest in the North African nations of Libya and South Sudan has cut down the global supply of crude oil since mid-2013. The recent protest in Venezuela has further resulted in a supply crunch, propelling the crude oil prices to rise further.

The WTI and Brent crude were last trading at $102.32 and $109.33 per barrel, respectively, at the time of reporting.

Natural Gas

Futures expiry week drives down gas prices

US natural gas prices fell for the third consecutive session on Wednesday, 26 February 2014, due to the expiry of March futures. Investors cashed out of the market before the March delivery as the US is beginning to witness milder climatic conditions. During the week, natural gas prices have fallen by 26.13% or $1.603 per million British Thermal Units (BTU).

On Wednesday, 26 February 2014, the natural gas prices on the NYMX for the March delivery fell 41 cents, or 8.1%, to $4.676 per BTU, before closing the day at $4.855 per million BTU, as shown in the graph below. The April future contracts fell 17 cents, or 3.7%, to $4.521 per BTU.

Source: Bloomberg
Source: Bloomberg

In the US, natural gas is used for power generation and household heating purposes. A rise in natural gas prices has driven the electricity prices to a record high in 2014. During the peak winter season, the prices of natural gas soared more than 45%, putting a pressure on individuals’ monthly budget.

The US is likely to face another polar vortex this week and a strong demand for heating purpose will further reduce natural gas supplies, resulting in the price rally. Natural gas was trading near its five-year high of $6.149 per million BTU at the dawn of the week

The high demand for natural gas owing to frigid climatic conditions has drained out gas inventories, raising concerns about the availability of gas for the next heating season.

The US natural gas inventory as on 14 February 2014 stood at 1.443 trillion cubic feet, the lowest weekly level since 2004.

US natural gas was last trading at $4.517 per million BTU at the time of reporting.

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