MARKET WATCH: Energy prices weaken as dollar strengthens

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 9 -- Energy prices continued falling May 6 with the front-month crude contract declining at a slower rate from the 9% drop it registered May 5 in the New York market.

While the broader markets gained 0.4% at the end of the week, West Texas Intermediate dropped more than 2% May 6—“continuing its largest weekly decline in more than 2 years on a strengthening dollar and Eurozone tensions,” said analysts in the Houston office of Raymond James & Associates Inc. “On the bright side, US payrolls grew by 244,000 jobs last month, the most significant gain since May 2010,” they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Prices bounced back up in the afternoon [of the May 6 session] before rumors that Greece might leave the euro (and return to the drachma)…pushed them back into red again,” putting the price of the front-month WTI contract “at an 8-week low.” Oil products also weakened, “but at a slower pace than crude, with reformulated blend stock for oxygenate blending (RBOB) trading only marginally lower,” he said.

Term structures of crude and products remained broadly unchanged, “which suggests that the sell-off has been across the curve and has little to do with any significant changes in underlying supply and demand fundamentals,” Zhang reported.

For the week, front-month WTI and Brent registered a net drop of $13.80/bbl and $16.76/bbl, respectively—“the biggest weekly fall since 2008.” Zhang said, “The sharp downward correction [was] triggered by some weaker-than-expected economic data and a reversal in the euro’s recent ascent. The European Central Bank failed to signal further rate increase for next month. Consequently, the euro lost 3.3% during the past week, which weighted on the oil prices.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts observed, “The plunge in prices on May 5 wiped off 10% of the value of front-month Brent futures, the second biggest daily price drop on record. The Brent price plunge has been accompanied by a collapse in the value of other over-hyped commodities such as silver. It is difficult to see any single factor that triggered the price collapse; indeed, it appears simply that a tipping point was reached and futures traders finally woke up to the demand destruction” that KBC analysts expected. They said, “Another way of explaining the scope of the decline is blind panic. A quote from a trader by Reuters news agency perfectly sums up the mood: ‘The instinct is to liquidate. Even if you are a bull, you need to have deep pockets to ride this out.’”

Meanwhile, the Institute for Supply Management (ISM) nonmanufacturing index’s weekly jobless claims and ADP national employment index came in below expectations, while the much anticipated nonfarm payroll for April “exceeded market expectations and appeared to have halted the recent slide in many risk assets, including oil,” Zhang said.

“Despite the uneven recovery in the US suggested by the recent data,” he said, “the broad picture remains positive, particularly the manufacturing sector in the US. The dollar is likely to remain under pressure, given the policy stance of the Federal Reserve Bank relative to other central banks.” Zhang described last week’s energy sell-off as “a correction after the very sharp upward move since February rather than a reversal of the upward trend.”

He said, “In fact, the long-term bullish trend remains intact. As the weak length in the market has been taken out, the market is building a foundation to attack new highs, barring any major economic upsets. As crude prices regain momentum, we expect distillate crack to come under more pressure due to seasonal decline in demand and high inventories.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The collapse in oil prices put a stop to the advance in equity markets, and the Standard & Poor’s 500 index gave back almost all of the gains of the previous week. The S&P was down 1.72% during the week and is now up 6.56% for the year-to-date while the NASDAQ was down 1.6% during the week and is up 6.58% year-to-date.”

Meanwhile, the Russell 2000 investment management index for small US companies, “which [recently] was printing an all-time record high, fell more heavily during the week, losing 3.69% for a year to date [increase of] 6.34%,” Jakob said.

“It was not a surprise to see that the largest losses during the week were in the energy and the materials sectors,” he said. “The financials sector remains very weak and the S&P remains in a pattern where it needs to see oil trending higher for the index to print higher highs.”

Last week’s US jobs data were mixed, Jakob said. “The nonfarm payrolls showed an increase of 244,000 [workers], which was higher than expected but about in line with the increases seen in February and March (after revisions),” he said. “The only problem is that jobs creation is only keeping pace with the expansion of the workforce. Therefore the Household Survey shows that the number of unemployed persons was actually unchanged during April and the unemployment rate increased from 8.8% to 9%, which is the first increase in 5 months, or in other words the first increase in the unemployment rate since the start of QE2 [the second phase of the Fed’s quantitative easing program to stimulate the US economy].”

Jakob said, “The problem with the US employment situation remains the historically low participation rate; as long as it does not improve, we can continue to have a situation where increases in nonfarm payrolls do no translate into a lower unemployment rate.”

Energy prices
The June contract for benchmark US light, sweet crudes fell $2.62 to $97.18/bbl May 6 on the New York Mercantile Exchange. The July contract dropped $2.57 to $97.77/bbl.
On the US spot market, WTI at Cushing, Okla., tracked the front-month futures price, down $2.62 to $97.18/bbl.

Heating oil for June delivery lost 4.12¢ to $2.85/gal on NYMEX. RBOB for the same month slipped by 0.53¢ to $3.09/gal.

The June natural gas contract declined 2.6¢ to $4.24/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 15.5¢ to $4.25/month.

In London, the June IPE contract for North Sea Brent crude was down $1.67 to $109.13/bbl. Gas oil for May lost $9.75 to $928.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell $8.40 to $104.40/bbl. Nonetheless the average price of that basket so far this year increased to $105.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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