MARKET WATCH: Euro falls to 2-year low, pulling down oil prices

Energy prices generally continued to trickle down in small losses May 29 as the euro tumbled to its lowest level against the dollar in almost 2 years following an international downgrade of Spain’s debt rating.

The broader market rose 1.1% on the hope Greece may remain within the Euro-zone while traders shrugged off a report of weak consumer confidence in the US economy. “Natural gas sank 5% [in the New York market] on worries that the coal-to-gas switching trend may be losing steam,” said analysts in the Houston office of Raymond James & Associates Inc. Energy prices were sharply lower in early trading May 30 as investors eschewed risks, they said.

On May 29, Egan-Jones Ratings Co. downgraded Spain’s credit from Bb– to B. The Spanish government's proposal to shore up the troubled Bankia SA with €19 billion of government bonds also fell through. Spain earlier this month nationalized Bankia, one of the banks most exposed to the collapse in the Spanish property market.

The European Union's executive office has since called for a Euro-zone “banking union" to centrally oversee and, if necessary, bail out the continent's financial system. But European governments with less debt problems fear bank rescues could undermine their stronger economies.

James Zhang at Standard New York Securities Inc., the Standard Bank Group said, “The oil market was again dragged down by the euro with both West Texas Intermediate and Brent falling slightly. The distillate market was also softer, while gasoline made small gains [in New York].” The Brent backwardation weakened on reports crude output from the Organization of Petroleum Exporting Countries hit the highest level in May since 2008, driven by increasing production from Saudi Arabia. Price differentials for physical crude cargoes remained stable, Zhang said.

He said, “The global oil inventory build so far this quarter has been limited. In particular, global oil product stocks have been falling sharply. As refineries set to ramp up run rates, we should expect to see further crude stocks get converted into product stocks. Nevertheless, the rather muted oil inventory build so far this quarter points to a tighter oil market for the rest of this year.”

Zhang said, “The sharp decline in oil prices has been partly driven by supply-demand fundamentals and market sentiment over the Euro-zone debt crisis. For the moment, we see upside risks to oil prices emerging as seasonal demand picks up amid heightening geopolitical risks over Iran. Despite the relatively sharp decline in oil prices, implied volatility remains relatively low by historical standards, which, in conjunction with the more attractive oil prices, provides a good hedging opportunity for consumers. In addition, our bearish view on product cracks means we favor crude rather than products as a consumer hedge.”

Meanwhile, release of the Energy Information Administration’s weekly report on US oil inventories is delayed until May 31 due to the May 28 Memorial Day holiday.

Energy prices

The July contract for benchmark US light, sweet crudes dipped 10¢ to $90.76/bbl May 29 on the New York Mercantile Exchange. The August contract dribbled a 6¢ loss to $91.09/bbl. On the US spot market, WTI at Cushing, Okla., was down 10¢ to $90.76/bbl in lock step with the front-month futures contract.

Heating oil for June delivery declined 2¢ to $2.81/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 1.36¢ to $2.91/gal.

The June natural gas contract fell 13.9¢ to $2.43/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped to $2.50/MMbtu on May 29 from $2.58/MMbtu when last traded May 25.

In London, the July IPE contract for North Sea Brent lost 15¢ to $106.68/bbl. Gas oil for June gained $2.75 to $911/tonne.

The average price for OPEC’s basket of 12 benchmark crudes was up 12¢ to $105.13/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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