MARKET WATCH: European woes, lagging demand lower oil prices

Crude oil prices tumbled again May 7 for the fourth consecutive session, down 0.6% for the day in New York as Euro-zone politics and economics roil and market fundamentals soften.

However, analysts in the Houston office of Raymond James & Associates Inc. reported natural gas futures rose 2.6% “on signs of rising utility demand.”

Corporate stocks “opened significantly lower [May 7] in reaction to the election of France's new Socialist President Francois Hollande and as Greek voters flocked to anti-bailout parties,” Raymond James analysts said. Weekend elections in the two countries “brought back into question the sustainability of the euro as investors contemplated the potential for Greece to revert back to the drachma,” they said. Broader market futures, crude, and natural gas were down in early trading May 8.

“Both West Texas Intermediate and Brent have fallen by more than 6% since the beginning of last week. Oil products were also sold in general. However, the time spread for ICE gas oil remained stubbornly strong, ahead of the May 10 contract expiry, which suggests some market participants may have been caught short of the front-month gas oil contracts,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The oil market was sold off heavily since [May 3], which appeared to be triggered by a massive risk-off move across most markets.”

The oil sell-off closely correlated with poor performance of Standard & Poor’s 500 Index, since both are driven by the prospects for US and global economic growth. “A general financialization of the oil market over the past few years is clearly evident here,” Zhang said.

He said, “The market is fearful in anticipation of what is coming in Europe following the latest elections in France and Greece. Consequently, the euro vs. the dollar has fallen to the lowest level since January. Across the Atlantic, the market is also concerned over the pace of the US recovery as the nonfarm payroll number for April was below expectations.”

Meanwhile, Zhang said, “The supply-demand fundamentals for the oil market have also been softening, reflected in the continuous decline in the Brent time spread at the front-end of the forward curve…. Both Brent flat prices and Brent time spreads have been on a downward trend since the beginning of April.”

He reported, “The recent [crude price] correction has been overdue while speculative lengths were close to record levels. We are still very cautious of a possible sharp drop in prices triggered by longs trying to exit the market en masse. In addition, we have previously noted that implied volatility is too low to be justified by all the uncertainties in the market.”

Energy prices

The June contract for benchmark US light, sweet crudes dropped 55¢ to $97.94/bbl May 7 on the New York Mercantile Exchange. The July contract fell 57¢ to $98.31/bbl. On the US spot market, WTI at Cushing, Okla., was down 55¢ to $97.94/bbl.

Heating oil for June delivery declined 2.74¢ to $2.98/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.17¢ to $2.97/gal.

The June natural gas contract, however, gained 5.7¢ to $2.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $2.30/MMbtu.

In London, the June IPE contract for North Sea Brent slipped 2¢ to $113.16/bbl. Gas oil for May lost $5.25 to $951.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $2.11 to $110.12/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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