MARKET WATCH: Oil prices mixed; gas price continues to fall

Although oil prices continued to gain on May 25, front-month crude futures traded down 1% for the whole of last week amid concerns over the deteriorating economy, particularly in Europe.

“Natural gas futures lost 6.3% on the week after climbing more than 35% over the prior month,” said analysts in the Houston office of Raymond James & Associates Inc. “With the Greek election only 3 weeks away and Spain's bailout of Bankia SA, we expect investor focus to remain heavily centered on Europe.” Spain earlier this month nationalized Bankia, one of the banks most exposed to the collapse in the Spanish property market.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market appeared to be stabilizing [on May 25]…. Oil products followed crude and ended the day slightly higher. The backwardation at the front-end of the Brent curve remains rather steep although the back-end has weakened significantly over the past few weeks. Elsewhere of note, the front-end of the West Texas Intermediate curve has been stable with the Seaway Pipeline starting to ship oil from Cushing, Okla., to the US Gulf Coast. Meanwhile, the ICE gas oil June-July spread is in a counter-seasonal backwardation, while the contango in heating oil [in New York] has steepened noticeably since the beginning of May.”

However, crude prices fell in early trading May 29 in London and New York after ratings agency Egan Jones downgraded Spain's sovereign debt on expectations widespread unemployment and a contracting economy will hinder Spain’s ability to repay debt.

Meanwhile, the Conference Board private research group said its Consumer Confidence Index dropped to 64.9 in May from a revised 68.7 in April, the biggest reduction in 8 months. The report said US residents worry about slow hiring, declining home values, a weak stock market, and a worsening European economy that threatens to undermine US recovery.

Nevertheless, Raymond James analysts reported, “Despite continued concerns from Europe of a potential Greek exit as well as Spanish banking issues, the broader markets were able to break a 3-week losing streak with the Standard & Poor’s 500 index up 1.7% last week.” The Oil Service Index and the SIG Oil Exploration & Production Index outpaced the broader markets, gaining 3.9% and 1.9%, respectively.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The S&P 500 managed to stabilize during the week…but is down 5.73% for the month and up 4.79% for the year. The NASDAQ was up 2.11% during the week and is down 6.86% for month but up 8.92% for the year.” He said, “The S&P 500 is close to the levels of last year for the same week, but the sectors that were leading in 2011 are trailing in 2012. Up until a few weeks ago, the financial sector was the leading sector this year, but it has been coming off since JP Morgan [Chase & Co., the biggest US bank] showed that investment banks transformed themselves from ‘too big to fail’ to ‘too big to whale’” (OGJ Online, May 11, 2012).

Jakob reported, “Apart from the German DAX, the other European stock markets are in red, and yields were not improving for Italy, Spain, and Portugal while Germany was selling during the week some 2-year bonds with zero yields. Spanish bank Bankia on May 25 asked the state to be kind enough to help it to the tune of an additional €19 billion while the Spanish state of Catalonia is asking for help in order to refinance its debts.” On May 28, the 10-year bond yields for Spain rose to 6.5%.

“With the fear of Greece and some resurgence of the fear of Spain, the euro-dollar [valuation] has been under serious pressure during the week and broke the support of 1.262, and 1.25 was broken on an intraday basis May 25,” said Jakob. “This will start to make things more complicated for the US Federal Reserve that has been doing everything it can to have a weak dollar. The correlations between oil, equities, and the euro-dollar remain at very high level.”

Zhang said, “While the Euro-zone sovereign debt crisis is still rocking the market, in particular the possibility of a Greek exit, the oil market has shifted its focus towards Iran after a disappointing round of negotiation over the country’s nuclear ambitions. The latest news suggests that Iran is holding back any International Atomic Energy Agency inspection while pushing ahead on its uranium enrichment program. This suggests that progress in the next round of negotiations, set for June 18-19 in Moscow, is unlikely to be made.”

He reported price differentials for physical crude cargoes have been strengthening, pointing to a tighter market due to healthy refining margins and the end of the spring maintenance season for refiners. “The counter-seasonal strength in European middle distillates also gives cause for concerns in terms of the potential for further tightening in the physical market,” he said.

Energy prices

The July contract for benchmark US light, sweet crudes continued to rise, up 20¢ to $90.86/bbl May 25 on the New York Mercantile Exchange. The August contract gained 21¢ to $91.15/bbl. On the US spot market, WTI at Cushing was up 20¢ to $90.86/bbl.

Heating oil for June delivery inched up 0.69¢ to $2.83/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 1.64¢ to $2.89/gal.

The June natural gas contract fell 7.9¢ to $2.57/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7.5¢ $2.58/MMbtu.

In London, the July IPE contract for North Sea Brent increased 28¢ to $106.83/bbl. Gas oil for June advanced $2.75 to $908.25/tonne.

The US market was closed May 28 for the Memorial Day holiday.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 42¢ to $105.01/bbl on May 28.

Contact Sam Fletcher at samf@ogjonline.com.

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