Obama’s Secret Weapon – Strategic Reserves and Sour Crude Oil

Crude oil recovered 10 cents this morning after falling below the $99 price level on Wednesday. WTI crude is holding at 98.09 but should continue to drop today after disappointing data continued to flow from China. Brent oil is flat at 107.47 with the spread now adjusting closer to normal at $9.50. U.S. crude futures traded near one-month lows hit on Wednesday after Washington announced a surprise plan for a test release of strategic oil reserves pushing crude oil to a daily low of 97.55. Another bout of China pessimism and tensions on the Crimean peninsula dominated market pricing again. Concerns have grown that China’s economy is slowing, perhaps sharply, although the term ‘hard landing’ hasn’t appeared yet.

China released lackluster data for industrial output, retail sales and fixed-asset investment for January and February, citing distortions from the weeklong Lunar New Year holiday, whose timing differs each year. Factory-production growth was the weakest for the first two months of the year since 2009 and compared with a 9.7 percent advance in December. Retail sales gained at the slowest pace for the first two months since 2004 and were projected to rise 13.5 percent, based on the median estimate in a survey of economists. Sales increased 13.6 percent in December. This should reduce the implied demand for crude oil.

Oil still remains supported as traders stress over the escalating geopolitical situation in Eurasian. The East-West split re-opened Wednesday when President Barack Obama threw Washington’s weight firmly behind Kiev in its stand-off with Moscow, following the ouster of Ukraine’s pro-Russian leader. Breakaway leaders on Ukraine’s Crimean peninsula, backed by Russian leader Vladimir Putin, plan to hold a referendum on Sunday to split from Kiev and come under Moscow’s wing. 

In its weekly report, the Energy Information Administration said crude stockpiles jumped 6.2 million barrels for the week ended March 7. Analysts were looking for a climb of 2.3 million barrels. American Petroleum Institute had reported late Tuesday an increase of 2.6 million barrels in crude supplies. Around time the supply data were released, news emerged that the U.S. Energy Department planned to sell up to 5 million barrels of sour crude from its Strategic Petroleum Reserve. In a notice of sale, the government said bids to purchase the oil are due Friday and delivery will be made in April. “Sour” crude contains high amounts of sulfur.

Natural gas recovered 6 points this morning to trade at 4.492 after ending lower on Wednesday, down 11.5 cents, or 2.5%, at $4.49 per million British thermal units, ahead of the market’s own weekly supply update from the EIA. Analysts polled forecast a drawdown of between 193 billion cubic feet and 197 billion. That would compare to a five-year average drawdown of 95 bcf. Traders will be watching closely for the release later today.