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Business News/ Money / Oil steady above $83 as market shrugs off downgrades
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Oil steady above $83 as market shrugs off downgrades

Oil steady above $83 as market shrugs off downgrades

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Singapore: Oil was steady above $83 on Thursday as energy markets shrugged off credit rating downgrades for southern European countries, encouraged by signs that US demand will improve this summer.

Standard & Poor’s on Wednesday cut Spain’s rating one notch a day after lowering Greece to junk status and downgrading Portugal, boosting concerns of spreading sovereign credit risk.

But the Federal Reserve left interest rates near zero and gave an upbeat assessment of the US economy.

Crude was also getting support from expectations that gasoline use in the United States will accelerate during the driving season between late May and early September.

Demand in the world’s top gasoline consumer jumped 3.1% in the past four weeks from a year earlier, causing an unexpected drop in gasoline stockpiles last week, government statistics showed on Wednesday.

“The market is too optimistic about the whole situation," said Clarence Chu, an energy trader at Hudson Capital Energy in Singapore, adding that its resilience to the European debt crisis was “quite bullish".

“People saw all the downgrades coming since a month ago, but oil is still quite strong," Chu said. “If you look at the charts for the past week or so, it seems like the market is quite comfortable around the $84 level."

U.S. crude for June delivery shed 14 cents to $83.08 a barrel by 0632 GMT, after climbing almost 1% on Wednesday, boosted by rising stock markets. Prices are about $4 lower than an 18-month high above $87 reached on April 6.

For a technical chart on U.S. crude prices, see: https://graphics.thomsonreuters.com/gfx/WT_20102904084607.jpg

ICE Brent crude for June slid 16 cents to $86, keeping a $3 premium to front-month U.S. crude after stockpiles at the Cushing, Oklahoma, delivery point for West Texas Intermediate crude climbed for a sixth consecutive week.

Total U.S. crude stockpiles rose by 1.9 million barrels in the week to April 23, the Energy Information Administration said on Wednesday, more than a forecast 1-million-barrel increase.

An oil glut in the US Midwest is creating distortions in oil futures markets. The front-month WTI contract, which usually trades at a premium to ICE Brent, this week has reached its biggest discount against the European benchmark in eight months.

“The US (oil) market is full of contradictions and dislocations at the moment," said Barclays Capital analysts headed by Paul Horsnell in a weekly note, describing it as “a combination of pockets of tightness and pockets of surplus".

Barclays said, “In short, the overall crude inventory surplus is still falling, but it has become entirely concentrated in just one region of the country."

Abundant supplies in the Midwest are also increasing incentives to stock more oil by depressing the value of prompt crude relative to contracts for later delivery. This market structure, known as contango, has shown discounts of about $2.50 for the front month WTI contract to the second month in the past two days.

But total US crude inventories have been rising by less than the seasonal norm, according to Barclays. And gasoline stocks fell by 1.2 million barrels last week, compared with estimates for an 800,000 barrel gain.

“The inventory report is not as bearish," Chu said. “There is a surprise draw in gasoline."

Distillates including heating oil and diesel rose by a larger-than-expected 2.9 million barrels, while the country’s total oil demand climbed 1% from a year earlier, according to the EIA.

“The driving season in the US is going to be a big indication of whether demand is actually recovering," Chu said.

The oil market was paying little attention to currency moves on Thursday, when the dollar weakened by about 0.1% against a basket of currencies as the euro recovered from one-year lows a day earlier.

Europe continued to haggle over a bailout package for Greece. The euro was beaten on Wednesday as Germany balked at the aid plan, but recovered in late U.S. trade on reports the rescue may be much bigger than anticipated and spread over several years.

Oil traders were also following the debate over US financial regulation in Congress.

A three-day US Senate standoff over efforts to overhaul financial regulation ended on Wednesday as Republicans dropped efforts to block a Democratic bill in exchange for a handful of concessions.

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Published: 29 Apr 2010, 01:32 PM IST
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