MARKET WATCH: Oil price decline accelerates; gas drops from 6-week high

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 29 -- The fall of oil prices accelerated to 1.2% Mar. 28 in the New York market after rebels regained control of Libya’s main export terminal while the front-month natural gas contract dropped 1.6% from a 6-week high as traders took their profits from the earlier run-up.

Libyan rebels were reported Mar. 29 in panicked retreat following a battle against Moammar Gadhafi’s superior ground troops on the approach to his hometown of Sirte, ending speculation in the previous trading session that the conflict could be heading towards an early conclusion. The rebels received no air support from North Atlantic Treaty Organization members during the brief battle. Apparently overcast skies prevented flying—a major drawback in NATO’s reliance only on airpower to help the rebels oust Gadhafi.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said the previous rally in crude prices “seems to have run out of steam.” He noted, however, “Several countries in the Middle East [and] North Africa (MENA) region still face political turmoil, including Yemen, Syria, and Bahrain.” Libya, he said, “remains in flux.”

Otherwise, analysts see “no big changes” in the oil markets. “Bombs continue to fall on Libya and radiation to fall on Japan,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “If scenarios for a solution can be built for Libya, the same cannot yet be done for Japan. This remains problematic because if the radiation levels continue to increase and spread, it could increase the number of shipping companies that refuse to sail to the bay of Tokyo.” US auto dealers already are reporting their inventory of cars and trucks made in Japan is running low.

“More reports of radiation fall-outs from the US to Europe (even if still minuscule) will also not help consumer sentiment and will come on top of still record unemployment and record (at least in Europe) gasoline prices,” Jakob pointed out. “Gasoline has been able to move back to parity with heating oil and to lose its contango, given that some of the reported stock draws of the last few weeks have been transfers out of winter stocks.”

Meanwhile, Zhang said, “Product cracks strengthened slightly due to some refinery glitches. The term structure for West Texas Intermediate weakened on the back of persistently high inventories at Cushing, Okla.”

Jakob pointed out the daily trading volume in benchmark US crude futures was at a low for the year on Mar. 25 but dropped “even lower” in the Mar. 28 session. “The world might be missing some Libyan crude oil, but for the last 10 days what the market is really missing is trading participation in the futures market,” he said. “We are in a situation where the speculative long positions are at very high levels but market liquidity at very low levels. This makes for a clear liquidity risk, and the intraday price action yesterday was a clear example of that risk, when the [New York] futures market gave back in the last 30 minutes all of the intraday gains.”

He noted the volume of trading on the New York Stock Exchange also was at a low for the year on Mar. 28, and the Standard & Poor’s 500 index “suffered a strong price setback in the last 30 minutes of trading.”

Jakob said, “In this low volume environment we can see that on an intraday basis crude oil futures were influenced by fluctuations in the dollar index as some correlation trades are still active and probably accentuated by the lack of volume. The euro is still well supported, but increasing interest rates [by Jean-Claude Trichet, president of the European Central Bank, are] now so priced-in and expected that we fear that we are heading into a buy-the-rumor, sell-the-fact [investment strategy] on the ‘buy the euro for the rate increase’ trade.”

Products tracking Brent prices
Zhang said, “Since the beginning of this year, WTI and Brent have diverged significantly on the back of storage concerns at Cushing, the WTI delivery point. Year-to-date, front-month Brent has gained over 20%, while front-month WTI has only gained 13%. Oil products have largely been tracking Brent instead of WTI. Consequently, fuel hedgers are shifting to Brent for their hedging to seek for better protection.”
He said, “It’s been reported lately that a number of airlines have moved their jet-fuel hedge from WTI to Brent. As a lighter cut in the middle distillate product group, jet fuel is typically traded at a premium to the ICE gas oil in Europe and heating oil [on the New York Mercantile Exchange] in the US.” Zhang pointed out, “Due to lack of liquidity for jet fuel contracts, airlines tend to hedge their jet consumption using crude, gas oil, and heating oil.”

As a result, he said, “NYMEX heating oil has been tracking Brent much more closely than WTI; therefore, it provides a better hedge for consumers. Other oil products such as gasoline and diesel also track Brent much more closely than WTI.” At the close of the Mar. 28 session, Zhang said, “The spread between front-month WTI and Brent was $10.78/bbl. Given the Cushing storage situation, it’s likely that this wide spread between Brent and WTI will stay for a prolonged period of time.”

Consequently, he said, “We might see further shifts in hedging activities from WTI to Brent. This underpins the increasing trading volume in Brent contracts on ICE. This emerging pattern has to be taken into account when examining market data…that is largely WTI-focused.”

Energy prices
The May contract for benchmark US light, sweet crudes traded at $103.60-105.76/bbl Mar. 28 before closing at $103.98/bbl, down $1.42 for the day on NYMEX. The June contract dropped $1.38 to $104.56/bbl. On the US spot market, WTI at Cushing was down $1.42 to $103.98/bbl.

Heating oil for April delivery lost 2.99¢ to $3.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.71¢ to $3.03/gal.

The April natural gas contract decreased 2.9¢ to $4.37/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., regained 18.1¢ to $4.34/MMbtu.

In London, the May IPE contract for North Sea Brent crude was down 79¢ to $114.80/bbl. Gas oil for April gained $1.75 to $981.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 54¢ to $110.37/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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