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Crude slips on US factory data, API report

Brent crude for May settlement slid 57 cents, or 0.5%, to USD 124.86/bbl on the London-based ICE Futures Europe exchange. NYMEX crude for May delivery slipped USD 1.22 to settle at USD 104.01/bbl. The premium of the European benchmark to WTI stood at USD 20.85, the widest spread since October.

Oil prices dipped 1.2% after the IS Commerce Department reported factory bookings rose 1.3%, while the median estimate had called for a 1.5% advance. Oil extended losses after the release of minutes of a March 13 Fed meeting showed reduced urgency to add monetary stimulus. A few Fed members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2%, according to the Fed minutes. The US central bank last month affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy may fail to grow fast enough to continue bringing down the unemployment rate. As we can see, investors failed to receive the insurance they were looking for, in the form of further quantitative easing, and this helped sour yesterday’s market sentiment.

Crude prices were little changed after the American Petroleum Institute said oil supplies rose 7.85 mn bbl last week, while gasoline inventories are expected to show a drawdown of 4.5 mn bbl and distillate stocks to be off by 1.4 mn bbl.

Moving forward, after last week’s major build in crude stockpiles, we do not expect to see another such huge number, although a gain of 3-4 mn bbl is possible, which would still send a fairly bearish signal. We think the US government has been importing more oil alongside its plan for a SPR release in a conscious effort to flood the market and drive down prices and in a bid to counter the bullish Iran premium which has kept prices sky-high in recent months.

That said, with the summer driving season right around the corner, gasoline inventories have been quite bullish in recent weeks (down 4.5 mn bbl last week) and there is still a chance that oil will follow gasoline and equities higher and decouple slightly from crude inventory numbers. Both benchmarks are down marginally this morning ahead of the mid-week inventory report due out at 14:30 today GMT. It’s also noteworthy that the recent downtrend has so far affected WTI more than Brent, which remains near USD 125/bbl, while the spread between US and European crude prices is back on the rise.