HOUSTON, Mar. 20 -- The front-month crude futures contract dropped to a 7-week low under $57/bbl Mar. 19 in the New York market after China's central bank raised its 1-year lending and deposit rates by 0.27 of a percentage point over the weekend.
That was the third hike in China's interest rate in less than a year, and it triggered fears of an economic slowdown in the world's fourth-largest economy that could reduce demand for energy.
However, the crude futures price partially recovered in premarket trading Mar. 20 in New York, "predicated on the expectation for another draw in US gasoline inventories going into the summer driving season," said analysts in the Houston office of Raymond James & Associates Inc. They said the market also was buoyed by a report that two Chinese workers were kidnapped in Nigeria.
"The current pattern of increasing demand for petroleum products, combined with decreasing crude oil prices, has led to an unsustainable level of profitability for refineries, and if demand holds, should lead to an increase in crude prices," said Raymond James analysts. They noted that ethanol margins have expanded because of higher gasoline prices.
"Over the last 8 weeks, due to strong demand, gasoline futures [prices] have surged 36%," said Raymond James analysts. "The increase in gasoline futures, combined with the fall of crude, has lead to $23 crack spreads, which is the highest level so far this year," vs. an average $10/bbl "over the last few years," they said.
The energy futures market now is "mainly supported by gasoline, which has managed to break the $1.95/gal resistance," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "There is room for profit taking on the gasoline crack while still supporting production economics, so we would have a cautious attitude to further gasoline gains when and as refinery capacity starts to come back on line in the coming weeks," he said.
The Société Générale Group said, "US gasoline is now the only driver of the [energy] complex. Focus is on the refiners and not on the producers anymore."
In other news, Iran's president requested an audience with the UN Security Council and will likely be issued a US visa to fly to New York City later this week. "The market interpreted this request by Iran's president as a move to buy time or perhaps take a more conciliatory stance, which in turn reduces the chances that Iran would curtail output any time soon in retaliation for the sanctions," said Robert S. Morris, Banc of America Securities LLC, New York.
Iran's request came after Russia and China agreed with the US and its allies to recommend freezing the assets of a state-owned bank and the Iranian Revolutionary Guard Corps, and to restrict travel by Iranian officials in an attempt to pressure that country to halt its nuclear power program.
"South Africa, who holds the rolling presidency of the UN Security Council, has called for a 90-day timeout on sanctions. This could further delay the signing process of further sanctions. We continue to opt for a cautious stand until the Iran speech to the UN, and we believe that until then we will have some erosion of the risk premium build in the flat price of crude oil," Jakob said.
The April contract for benchmark US light, sweet crude dropped 52¢ to $56.59/bbl Mar. 19 on the New York Mercantile Exchange. The May contract, however, gained 12¢ to $59.70/bbl. On the US spot market, West Texas Intermediate was down 52¢ to $56.60/bbl. Heating oil for April delivery slipped by 0.04¢ but remained virtually unchanged at $1.69/gal. The April contract for reformulated blend stock for oxygenate blending (RBOB), however, escalated by 5.1¢ to $1.96/gal on NYMEX.
The April natural gas contract dropped 7.7¢ to $6.85/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., lost 10.5¢ to $6.73/MMbtu. "On the natural gas front, after a 3-day decline mostly related to weather, prices were relatively flat in the premarket [trading Mar. 20 on NYMEX]," said Raymond James analysts. They reported heating degree days last week were 8% warmer than expected and substantially warmer than normal. Moreover, LNG imports for the month of March are expected to come in at an average of 2.8 bcfd, up from 1.1 bcfd in March 2006. "We believe that we are tracking to end winter with storage of 1.45 tcf," said Raymond James analysts
Meanwhile, analysts at Enerfax Daily reported, "The [natural gas] market is flush with traders holding short positions, each hesitant to start a buying rally that would drive prices higher." Speculators increased their number of short positions in natural gas futures by 13,388 contracts, or 14%, last week. "Too many people are already short. They all want someone else to sell it lower so that they can make money, but there are not enough sellers to push it lower. One piece of bullish data could spark a short-covering rally above $7.30 in a hurry," said Enerfax Daily.
In London, the May IPE contract for North Sea Brent crude climbed by 22¢ to $60.52/bbl. But the April contract for gas oil lost $4.50 to $532.25/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes was down 11¢ to $56.62/bbl on Mar. 19.
Contact Sam Fletcher at email@example.com.