MARKET WATCH: Crude oil accelerates loss; natural gas also down

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 4 -- The front-month crude oil contract fell more than 2% May 3 in the turbulent New York market as the dollar strengthened and traders worried about above-average inventories. Natural gas was down a modest 0.5%.

Corporate energy stocks also were pulled lower, with a 3% decline in the Oil Service Index and SIG Oil Exploration & Production Index (EPX) down 3.5% while the equity market was relatively flat, said analysts in the Houston office of Raymond James & Associates Inc.

Oil and gas prices continued falling in early trading May 4. Equity stocks also fell sharply in early trading after Automatic Data Processing Inc.’s National Employment Report showed 179,000 new private sector jobs were added in April, far less than expected. The Institute for Supply Management (ISM) reported its service sector index rose at the slowest pace in 8 months. The two reports signify a weakening economy.

“Oil was under continued selling pressure yesterday, with both crude and oil products registering sizable losses,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Compared with “the weakening flat prices,” he said, “the term structures of West Texas Intermediate and North Sea Brent remain largely unchanged.”

Zhang said, “In the financial markets, the dollar paused in its recent decline, which put some pressure on commodities yesterday. However, our view is that the dollar’s decline is not over yet, and it’s likely to test the low seen in 2008. Meanwhile, the negative sentiment, owing to a sharp decline in silver over the past few trading sessions (triggered by a rapid increase in margin requirements), has spilled over into the other commodity markets. This, too, is likely to be a temporary factor.”

He said, “We see the bias remaining to the upside owing to raised geopolitical risks, tighter global monetary policies, and the strengthening economy.”

Other analysts at the Standard Bank Group said, “Data in the next few days will put the focus on monetary policy again. From Europe and China, we expect events to be generally negative for industrial commodities. The US data should confirm medium-term support, especially for gold.”

Standard Bank does not expect another rate hike as in April at the European Commerce Bank meeting on May 5. However, analysts said, “The bank’s stance will probably be hawkish. The impact on commodity prices may be seen via the euro-dollar exchange rates, but we doubt that this will be a substantial commodity market moving event.”

On May 3, the market price of silver dropped 17.5% from the highs of Apr. 29, said Olivier Jakob at Petromatrix, Zug, Switzerland.

As the second phase of the Federal Reserve System’s quantitative easing program comes to a slow end, Jakob said, “The passive investors need soon to make the decision whether to cash in on the commodity returns of the last 6 months or stay the course as in 2008 with the risk of losing it all again.”

He said, “Given that the rise in the equity indices has more to do with the rise of oil shares than of financial shares, a downward correction in oil will also be negative for [corporate stocks on] the Standard & Poor’s 500 Index. From equity indices to commodity indices, global markets are in need of a further crush on the dollar to maintain the positive momentum. Yesterday the dollar index was slightly higher, but it will need to be pushed lower to prevent a systemic correction lower in commodity and equities.”

In other news, Stephen Harper’s Conservatives “won big” in Canada’s May 3 federal election, moving “from a minority to a majority government,” said Raymond James analysts. “Oil sand producers are surely breathing a sigh of relief as there was a real possibility that the leftist National Democratic Party (NDP) could win enough seats to partner with the Liberals in a coalition government,” they said. “The NDP ran on plans for a national carbon trading program, which the Liberals and the Bloc Quebecois also support. The Conservatives are staunchly opposed to cap-and-trade and carbon taxes. Their win is another sign that support for those policies is eroding not only in the US but globally as well.”

US inventories
The Energy Information Administration said May 4 commercial US benchmark crude inventories increased 3.4 million bbl to 366.5 million bbl in the week ended Apr. 29, above average for this time of year. The Wall Street consensus was for a 2 million bbl gain. Gasoline stocks lost 1 million bbl to 204.5 million bbl in the same period, exceeding analysts’ expectations of a 500,000 bbl decrease. Finished gasoline inventories declined while blending components stocks increased. Distillate fuel inventories fell 1.4 million bbl to 145.1 million bbl, compared with the market outlook for a 500,000 bbl increase.

The American Petroleum Institute earlier reported a 3.2 million bbl gain in US crude stocks to 364.2 million bbl in that same week. API officials said gasoline inventories were up 680,000 bbl to 211.3 million bbl, while distillates fell 1.5 million bbl to 146.9 million bbl.

Imports of crude into the US were down 389,000 b/d last week to 8.9 million b/d, EIA said. In the 4 weeks through Apr. 29, US crude imports averaged 8.7 million b/d, down by 839,000 b/d from the comparable period in 2010. Gasoline imports averaged 1.1 million b/d while distillate fuel imports averaged 197,000 b/d.

The input of crude into US refineries dipped by 18,000 b/d to 14.1 million b/d during the latest week, with units operating at 82.8% of capacity. Gasoline production decreased slightly to 8.8 million b/d, and distillate fuel production increased to 4.2 million b/d.

Energy prices
The June contract for benchmark US light, sweet crudes accelerated its decline May 3 on the New York Mercantile Exchange, dropping $2.47 to $111.05/bbl. The July contract lost $2.48 to $111.56/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.47 to $111.05/bbl.

Heating oil for June delivery fell 6.13¢ to $3.19/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.85¢ to $3.33/gal.

The June natural gas contract decreased by 2.3¢ to $4.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ to $4.62/MMbtu.

In London, the June IPE contract for North Sea Brent crude dropped $2.67 to $122.45/bbl. Gas oil for May fell $20.75 to $1,019/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $1.15 to $118.75/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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