MARKET WATCH: Fading economy brings down oil prices

Oil prices continued to tumble May 3 with front-month crude down 2% in the New York market among growing evidence of a weakening economy around the globe. On the brighter side, the front-month natural gas contract rebound, up 3% May 3 after a bullish inventory report (OGJ Online, May 3, 2012).

The decline in energy prices spilled over into early trading May 4 with the front-month crude contract temporarily dropping below $100/bbl for the first time since February. It fell to $99.90/bbl intraday before climbing back above the $100/bbl level.

The low came after the US Department of Labor reported US employers added just 115,000 new jobs in April. That’s fewer than the revised number for March and well below the hiring pace earlier this year.

The official US unemployment rate is at a 3-year low of 8.1%. However, the government’s definition of unemployed is limited to people actively looking for work. In reality, many ex-workers have exhausted their unemployment benefits and have given up looking for nonexistent jobs, thus dropping off the Labor Department’s tally. Other sources report the percentage of adults who are working or actively looking for work is at the lowest level in more than 30 years.

Following the “violent set-back” of oil prices in May 3 trading, Olivier Jakob at Petromatrix in Zug, Switzerland, noted nearly a year ago on May 5, 2011, “crude oil prices collapsed by close to $10/bbl.” He said, “What triggered the move last year: a better-than-expected Department of Energy stock report; worries about…nonfarm payrolls; and Jean-Claude Trichet, [then-president of] the European Central Bank, saying that interest rates would not change in the near term. What did we have this week: a well-supplied DOE report (at least on the crude oil side), worries about today’s nonfarm payrolls, and [Mario] Draghi [current president of] the ECB not providing a hint of interest rate change in the near term. The $10/bbl move of a year ago proved to be devastating for many hedge funds, which then struggled for the rest of the year to make up for the loss of that day and resulted in them shutting down or downsizing in 2012.”

Despite similar conditions, the market hasn’t suffered such a large 1-day drop this year. However, Jakob said, “The global economic recovery remains something a bit elusive, and we still have the risk in the coming 2 weeks that Iran comes up with a better-than-expected proposal for the resolution of the crisis around its nuclear enrichment. Iran has been building crude oil afloat, and it can be that they expect that their proposal at the Baghdad meeting will be answered with some sort of easing on the sanctions that allows them to then draw down those stocks at sea.”

In other news, analysts in the Houston office of Raymond James & Associates Inc. reported Argentina's lower house of Congress nationalized Repsol YPF SA’s holdings in that country, in a move that has already evoked strong international discontent. The YPF part of that international firm was once Argentina’s state owned oil company until sold in 1999 to Repsol SA in Spain. It is still the largest oil company in Argentina. In response to Argentina taking back those assets, Spain is curtailing biodiesel shipments to the South American country.

Energy prices

The drop in the price for the June contract for benchmark US light, sweet crudes accelerated by $2.68 to $102.54/bbl May 3 on the New York Mercantile Exchange. The July contract fell $2.66 to $102.92/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.68 to $102.54/bbl.

Heating oil for June delivery declined 5.56¢ to $3.09/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 2.57¢ to $3.05/gal.

The June natural gas contract regained 8.7¢ to $2.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.6¢ but remained essentially unchanged at a rounded $2.29/bbl, a closing price it has sustained through three consecutive trading sessions.

In London, the June IPE contract for North Sea Brent dropped $2.12 to $116.08/bbl. Gas oil for May fell $11.25 to $988.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.37 to $115.31/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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