AFKI Commodities Report: Oil Drops On China, SPR Move

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Written by Lynda Davies

After their strong rally last week, oil futures dropped back sharply this week on downbeat economic data from China and surging U.S. inventories. U.S. government plans for a ‘test’ release from the country’s Strategic Petroleum Reserves (SPR) added to the pressure on crude prices. Brent crude’s fall though was limited by worries about Libya and the prospect of European Union sanctions on Russia over Ukraine.

U.S. light, sweet crude – the West Texas Intermediate (WTI) – for April delivery on the New York Mercantile Exchange (Nymex) settled at $98.60 a barrel on Mar. 12, down two percent on the day and some $3.94 down from where it opened the week. April WTI had touched a five-month high of $104.92 on Mar. 3, amid fears of global supply disruptions following Russia’s intervention in Ukraine.

The markets also were digesting further less-than-positive economic data from China, including an 18 percent slump in the country’s exports last month. The news reinforced fears that the country’s economic growth is slowing.

The U.S. government announced on Mar. 12 that it plans to sell 5 million barrels of crude from the SPR to test the capabilities of the country’s emergency stockpile. Some analysts speculate the decision has been sparked by Russia’s move on eastern Ukraine. More bearish news for the crude market came from the U.S.’ Energy Information Administration (EIA) which reported Mar. 12 a far bigger than expected increase in the country’s commercial crude inventories for the week ending Mar. 7.

The EIA data showed total commercial crude stocks increased by 6.2 million barrels to 370 million barrels last week. This marks the seventh straight week of inventory rises, triggering further concerns about oil demand strength.  The latest inventory climb came despite a further drawdown of crude stored at the key Cushing, Oklahoma hub. Cushing is the physical delivery point for Nymex’s WTI contracts.

Cushing stocks fell by 1.3 million barrels to 30.8 million barrels in the week ending Mar. 7, according to EIA data. Much of the drawdown at Cushing follows the start of commercial operations of TransCanada Corp.’s Gulf Coast pipeline. The pipeline runs to Nederland, Texas, from Cushing and started commercial lifting on Jan. 22.

Meanwhile, Brent crude for April delivery on the London-based ICE Futures Europe exchange settled at $107.35 a barrel on Mar. 12, down $1.65 from the start of the week. April Brent on Mar. 3 had reached $111.20 a barrel, its highest settlement since late December.

Analysts said political tensions in Libya and worries about Russia’s involvement in Ukraine are helping limit further price declines for the European benchmark crude.

Russia worries support palladium

U.S. palladium futures continue to trade near the one-year high reached last week amid worries about the prospect of economic sanctions against Russia for its involvement in Ukraine. Economic sanctions against the country could disrupt exports of the metal from the world’s largest producer. The Russian Federation produced some 38-39 percent of the world’s palladium supply last year.

Palladium so far has been less affected by the South African mine strike that is now entering its eighth week. Nevertheless, the country is the world’s second largest producer of the metal, accounting for about 35 percent of supply last year.

Palladium for June delivery on Comex settled at $771.15 an ounce on Mar. 12, some $13.85 off the $785-an-ounce level hit on Mar.6. This latter price marked the highest for a most-active contract since Mar. 8 last year. Spot palladium was fixed at $776 an ounce in London’s pm fix on Mar. 13, down only $4 on the $780 London pm spot fix on Mar. 6.

South Africa’s platinum strike has halted production at the mines of the world’s top three platinum producers since Jan. 23, and there is no settlement in sight. Government-brokered wage talks between Anglo American Platinum (Amplats), Impala Platinum (Implats) and Lonmin and the country’s Association of Mineworkers Construction Union (Amcu) broke down last week and, according to the three producers, have been “suspended indefinitely”.

To date the seven-week dispute has cost the three companies R8,208.5 billion ($754.7 million), as at 18.00 hrs GMT, according to the Amplats, Implats and Lonmin website portal set up to provide updates on the 2014 wage negotiations.