U.S. oil pares losses, Brent up after Mexico explosion

By David Sheppard

NEW YORK (BestGrowthStock) – U.S. crude oil pared losses and Brent crude turned positive after a deadly explosion ripped through a Mexican oil refinery, raising concerns that Mexico, a top U.S. crude supplier, would have to import more fuel.

U.S. product futures surged after news of the blast at the 275,000 barrel-per-day Cadereyta plant, Mexico’s third biggest and most sophisticated refinery.

Mexico, which already relies on imports for more than 40 percent of domestic gasoline demand, could now be forced to boost fuel imports significantly.

“This should increase Mexico’s demand for imports from the United States – one of the key things that will eventually drag down record U.S. oil product stocks is export demand,” said Andy Lebow, senior vice president of energy at MF Global in New York.

“Gasoline and heating oil have definitely been supported by news,” Lebow said. “Crude is also getting dragged along. Even though a refinery going offline should mean lower demand for crude, the broader market is not going to ignore rising product prices.”

U.S. benchmark October crude had been down almost $2 a barrel on concerns about European banks. But after news of the explosion, U.S. crude pared losses to settle at $74.09, down just 51 cents a barrel from Friday’s close, having traded in a range of $72.63 to $74.63 a barrel. U.S. crude did not trade on Monday because of the Labor Day holiday.

Brent crude was up 57 cents from Monday’s close to $77.44 at 1926 GMT.

U.S. RBOB gasoline futures rose from a session low of $1.8816 a gallon to a peak of $1.96661 after the blast. The contract settled at $1.9329 a gallon, up 0.7 percent. Heating oil rose 0.8 percent to settle at $2.0743 a gallon.

Mexico’s state oil company Pemex (PEMX.UL: ) confirmed at least one person was killed in the blast, which it said occurred following a leak in a compressor at the diesel-making unit at the refinery that resulted in a brief fire.

Two other workers were severely burned and eight suffered minor injuries in the explosion.

BANKING WORRIES

U.S. and European stock markets fell on banking sector worries after the Wall Street Journal reported bank stress tests of major lenders in Europe understated their holdings in potentially risky government debt.

Rob Montefusco, a trader at Sucden Financial in London, said the news had sparked a flight from riskier assets like commodities that weighed on oil prices.

“Equities came off, the dollar is strong — it’s pretty much a knock-on effect,” Montefusco said.

The dollar was up 0.6 percent against a basket of currencies as traders shed riskier assets (.DXY: ). A strong dollar makes crude more expensive for other currency holders.

Brent crude in London remained at an atypical premium to U.S. crude as brimming inventories weighed on the U.S. benchmark.

The premium hit its highest since mid-May, bolstered by recent maintenance work in North Sea fields and strong Russian Urals crude prices.

A gauge of the U.S. job market declined in August, underscoring concerns about prospects for oil demand.

The Conference Board, a private research group, said its Employment Trends Index fell to 96.7 in August from a revised 97.4 in July, signaling U.S. employment growth may continue to slow in coming months.

The U.S. Labor Day holiday on Monday marked the end of the country’s driving season, when gasoline demand rises as people go on vacation. This, and high unemployment in the world’s top energy consumer, has raised concerns about the demand outlook.

U.S. crude oil stockpiles likely fell for the first time in three weeks last week due to lower imports as refineries took precautionary measures taken ahead of stormy weather, a preliminary Reuters poll ahead of weekly inventory reports showed on Tuesday.

Crude oil inventories are expected to have fallen by 600,000 barrels. The poll also showed forecasts for a 700,000 barrel increase in distillates, which include heating oil and diesel fuel, and a 900,000 barrel decline in gasoline supplies.

The industry report from the American Petroleum Institute will be released at 4:30 p.m. EDT (2030 GMT) Wednesday.

The U.S. Energy Information Administration’s inventory data will follow at 11 a.m. EDT on Thursday.

(With additional reporting by Dmitry Zhdannikov and Alex Lawler in London, Alejandro Barbajosa in Singapore; Editing by David Gregorio)

U.S. oil pares losses, Brent up after Mexico explosion