MARKET WATCH: Oil prices drop sharply as economy falters

Oil prices had the trajectory of a thrown rock June 21 with front-month contracts falling below $79/bbl for West Texas Intermediate and under $90/bbl for North Sea Brent.

“Yesterday was one crummy day for the markets, with energy really taking it on the chin,” said analysts in the Houston office of Raymond James & Associates Inc. The Standard & Poor's 500 Index dropped 2.2%, but that “paled in comparison to WTI’s 4% plunge, taking oil prices to their lowest level since October,” they said. “While natural gas gained 2.6% [in the New York futures market] after a bullish storage report, it wasn't nearly enough to save energy stocks, with the [Oil Service Index] and the [SIG Oil Exploration & Production Index] both dropping more than 5%.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market suffered another heavy blow on downbeat US economic data and rumors of bank downgrades by Moody ’s [Investors Service Inc.], which were later confirmed. Crude underperformed oil products again as the sell-off has been led by the apparent long liquidation in crude. The term structures across both the Brent and the WTI curves also fell really hard, which has pushed the first 12 months of the Brent curve and the whole WTI curve into contango. Both structures have recovered somewhat this morning. In the options market, implied volatility spiked again as the flat price fell sharply.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The S&P 500 suffered a strong set-back, and Europe looks worse and worse by the day. The only solutions now being proposed are to break the rules: The European Central Bank is looking at relaxing its rules on collateral that can be used for its loans, the European Union continues to push for a ban on rating agencies, etc.”

Zhang reported, “The US published a set of disappointing economic data, including weekly job numbers and the Philadelphia Federal Reserve survey, which weighed on market sentiment. However, it’s the rumor of imminent rating downgrades on a number of major global banks by Moody’s that has sent risky assets tumbling, with the Dow Jones Industrial Average dropping by more than 250 points. The US dollar strengthened by around 1%, which has caused dollar-denominated commodities to tumble.”

US gas inventory

The US Energy Information Administration reported the injection of 62 bcf of natural gas into US underground storage in the week ended June 15, below Wall Street’s consensus expectation for an input of 64 bcf. That raised working gas in storage above 3 tcf—680 bcf higher than last year at this time and 641 bcf above the 5-year average (OGJ Online, June 21, 2012).

Raymond James analysts said, “Coal-to-gas switching continues to trend higher running 3-5 bcfd tighter for most of the year and switching an average of 5.7 bcfd through the first 3 months of the year. The real question is whether or not these levels of switching are sustainable. We would suggest the answer is no, primarily due to our belief that coal has become the more marginal supplier. As we enter into more normal summer weather, coal will be used to meet incremental demand. However, we would expect April and May switching levels to remain elevated due to shoulder season and continued mild weather.”

Meanwhile, the continued decrease in demand for hydroelectic power, “given this year's low snow pack, should help take additional supply out of the gas market,” they said. With current gas prices around “$2.60/Mcf and [our] belief that coal-to-gas switching slows in the $2.50/Mcf range and could actually reverse in the $3/Mcf range, we suspect switching will slow significantly in the near future,” said Raymond James analysts. “All in all, we expect coal-to-gas switching to average an impressive 4.3-4.5 bcfd for 2012, well north of last year's 1.8 bcfd.”

Energy prices

The new front-month August contract for benchmark US light, sweet crudes dropped $3.25 to $78.20/bbl June 21 on the New York Mercantile Exchange. The September contract fell $3.28 to $78.56/bbl. On the US spot market, WTI at Cushing, Okla., was down $3.60 to $78.20/bbl.

Heating oil for July delivery retreated 6.21¢ to $2.53/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 4.01¢ to $2.55/gal.

The July natural gas contract climbed 6.5¢ to $2.58/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., lost 6.7¢ to $2.53/MMbtu.

In London, the August IPE contract for North Sea Brent was down $3.46 to $89.23/bbl. Gas oil for July fell $19.25 to $822/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $3.60 to $89.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com

 

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