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MARKET WATCH: Politics, the economy pull down energy prices

Energy prices fell sharply May 4 with the front-month contract for benchmark US light, sweet crude closing below $100/bbl in New York for the first time since early February.

Equity and energy commodity prices fell farther in early trading May 7 after French President Nicolas Sarkozy was defeated over the weekend by Francois Hollande—the first socialist president of that country in 17 years—who campaigned to boost government spending. The pro-austerity coalition parties in Greece also lost support as angry voters rejected proposed budget cuts to reduce sovereign debt. This renewed speculation Greece may not remain a member of the Euro-zone.

In the UK, meanwhile, the media report a “civil war” within the coalition government of the Conservative and Liberal Democrat parties following heavy losses for both in local elections last week that favored the opposition Labor Party. A major source of disagreement between the coalition parties is whether to continue government support for wind farms.

“The French election result, which was largely expected, may be a harbinger of more political change as voters across Europe have shown a disdain for the proposed austerity measures to rein in the debt crisis,” said analysts in the Houston office of Raymond James & Associates Inc. “Hollande will certainly provide increased opposition to German Chancellor Angela Merkel, a backer of further austerity measures across the Euro-zone.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Crude continues to struggle after Brent crude fell below its 200-day moving average last week.” The front-month Brent contract opened today at $112.80/bbl, “well below” the May 4 closing price, he said.

“The recent trend of summer weakness appears set to emerge for a third year running for the developed economies, with the market increasingly looking towards central banks for support,” said Zhang. “With regard to oil market fundamentals, low seasonal demand during the second quarter continues to keep the market under pressure. In addition, Saudi Arabia has clearly stepped up its efforts to pump more oil into the market…. [G]iven the shift in the Brent crude term structure, we remain bearish on oil market fundamentals.”

Meanwhile, product demand remains sluggish. Zhang said, “US gasoline demand is falling fast amid a fragile economic recovery and very high oil prices. Total US gasoline demand has fallen significantly below its previous 5-year range. A weak job market and improving passenger car fuel efficiency have both played big roles in keeping the demand down.”

However, he said, the “much feared supply crunch for gasoline in the Atlantic Basin” apparently is less likely, with refineries slated to be closed on both sides of the ocean now probably will remain active under new owners.

“Gasoline inventories in the US remain comfortable, especially viewed through days of supply, which take into account a rapid demand decline. US gasoline inventories measured by days of supply have been above their 5-year range since the beginning of this year,” Zhang said.

With the US summer driving season to begin within a few weeks, he said, “The bullish gasoline story appears to be over already, reflected in the sharp sell-off in gasoline cracks and their time spreads. The weakness has already started to weigh on refinery margins, which will in turn keep the oil market under pressure.”

Energy prices

The June contract for benchmark US light, sweet crudes dropped $4.05 to $98.49/bbl May 4 on the New York Mercantile Exchange. The July contract lost $4.04 to $98.88/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.05 to $98.49, in step with the front-month futures contract.

Heating oil for June delivery fell 7.81¢ to $3.01/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 7.42¢ to $2.98/gal.

The June natural gas contract declined 6.1¢ to $2.28/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., slipped 0.6¢ but closed virtually unchanged at a rounded $2.29/MMbtu.

In London, the June IPE contract for North Sea Brent lost $2.90 to $113.18/bbl. Gas oil for May plunged $31.50 to $956.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $3.08 to $112.23/bbl. So far this year, OPEC’s basket price has averaged $117.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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