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MARKET WATCH: Crude oil prices resume downward trend

After a 1-day break in the recent losing streak, oil prices retreated again May 11 because of continued economic and political turmoil in Europe, the weakening euro, and less-than-expected growth in China’s industrial production and power output, among other issues.

The equity market remained in a slump. “The Standard & Poor’s 500 Index printed a second consecutive week in the red, losing 1.15% during the week for a year-to-date increase of 7.62% while the NASDAQ [National Association of Securities Dealers Automated Quotation system] lost 0.76% for the week and is up 12.62% for the year,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “In the other main stock markets, more of Europe is starting to be flat or slightly red for the year.”

Energy and stock prices continued sinking in early trading May 14 as coalition negotiations among various Greek political parties reached a stalemate, “crushing earlier hopes that the debt-ridden nation would avoid another round of elections next month,” said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, some bookmakers “have stopped taking bets on whether Greece will stay in the Euro-zone,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “Although around 70% of the Greek electorate is reported to want to stay in the Euro-zone, about the same proportion of voters do not want austerity, positions which are clearly incompatible. Germany has made clear that it will not renegotiate the bailout plan thrashed out in last-ditch talks earlier this year, so it increasingly looks more a question of when rather than if Greece will exit the Euro-zone.”

KBC analysts reported, “Regime change in France has also not helped the mood. As expected, incumbent Nicholas Sarkozy was ousted by socialist candidate Francois Hollande in the presidential election run-off on May 6. Perhaps because they had expected it, the response of financial markets was surprisingly sanguine; France’s new leader has been talking in terms of economic stimulus through reallocating existing spending rather than new spending. But the French poll result is yet another reminder of the deep unpopularity of austerity. Meanwhile, Spain has nationalized Bankia SA, one of the banks most exposed to the collapse in the Spanish property market, and promises to make sweeping banking sector reforms. It needs to act quickly. Spain is now widely regarded as the weakest link among European debtors. Managing the Euro-zone debt crisis has been like doing a juggling act on a tightrope, and there is still no safety net below.”

Jakob said, “European Union policy makers are out trying to give the spin that it would not be catastrophic if Greece was to leave the Euro-zone as this outcome becomes a greater risk.” Meanwhile, he said, “The amount of cash held at the European Central Bank came down by €100 billion during the week and at €703 billion was at the lowest level in a month. The yields on the 10-year bonds rose by about 0.25% for Italy and Spain; and that brings Spain back above the 6% mark.”

He said the euro-dollar valuation broke the support of 1.30 and continued to trend down. “We now have to watch the support at 1.286 and then at 1.262. The inter-asset correlations are running at a high level, and it is difficult for commodities to resist the general risk-off pattern,” Jakob said.

Last week “did not start very well with the continued worries over Greece, and sentiment was pressured at the end of the week with the ‘hedge that might not be a hedge’ at JP Morgan Chase & Co. After the [May 11] close, Fitch Ratings Ltd. downgraded JP Morgan due to ‘complexity and opacity’ of the positions that is leading to the JPMorgan losses,” Jakob reported (OGJ Online, May 11, 2012).

Oil prices ‘over the edge’

“Oil prices have been teetering on the brink for some time and finally went over the edge [last] week,” KBC analysts said. “Brent prices are now more than $16/bbl below the peaks reached in March when geopolitical tensions led market participants to fear an Israeli attack on Iran’s nuclear facilities and the possibility that Iran might try to close the Hormuz Strait.”

They said, “It is difficult to pin the recent change in sentiment on any single factor. Lowered tension between Iran and the West ahead of a May 24 meeting in Baghdad between Iran and [UN Security Council members] is certainly a factor. The new travails of the Euro-zone have also played a part. But underlying these factors is a simple supply-side reality: Saudi Arabia has filled the gap left by the drop in oil exports from Iran following EU sanctions that formally go into effect in July.”

Figures reported by Organization of Petroleum Exporting Countries suggest Saudi oil production stood at 10.1 million b/d in April, even higher than the 9.9 million b/d KBC estimated in its latest monthly report.

“Saudi lifters have been allocated full contract volumes for June as well as May, according to industry reports, suggesting that the kingdom intends to keep the market well supplied as the EU embargo on lifting Iranian crude oil goes into effect,” KBC analysts said. “OPEC said in its monthly oil report that April production had risen to 31.6 million b/d as a result of increases also from Iraq and Libya, which compares with 30 million b/d negotiated by the producers’ group in December.”

Energy prices

The June contract for benchmark US light, sweet crudes fell 95¢ to $96.13/bbl May 11 on the New York Mercantile Exchange, wiping out the small gain in the previous session. The July contract dropped 92¢ to $96.49/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 95¢ to $96.13/bbl.

Heating oil for June delivery declined 1.98¢ to $2.96/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.94¢ to $3/gal.

However, the June natural gas contract gained 2.2¢ to $2.51/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 2.1¢ to $2.36/MMbtu.

In London, the June IPE contract for North Sea Brent was down 47¢ to $112.26/bbl. The new front-month June contract for gas oil increased 50¢ to $950.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost 82¢ to $109.24/bbl. So far this year, OPEC’s basket price has averaged $117.13/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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