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MARKET WATCH: Crude oil, natural gas prices fall further

Oil and gas prices steepened their decline July 6 and were down further in early trading July 9 amid more signs of economic instability and market uncertainty ahead of corporate earnings reports for the second quarter.

The Dow Jones Industrial Average appeared destined for its third consecutive loss after the rate on Spain’s 10-year government bonds rose July 9 by 0.13% to 7%—the level that previously sparked applications for bailouts of Greece, Ireland, and Portugal. Italian bond yields hovered near the same mark.

On the other hand, the Norwegian Oil Industry Association (OLF) last week announced a lock-out of offshore workers effective midnight July 9 after negotiations between labor and management failed to end a strike. That would stop production of 3.8 million boe/d of liquids and natural gas from the Norwegian continental shelf.

While the Norwegian government has the right to intervene in the situation, Marc Ground at Standard New York Securities Inc., the Standard Bank Group, noted, “It has until now only played a mediation role. The likelihood is that the government will intervene should it be deemed that a significant volume of production over the medium term was at risk, threatening the national interest. However, until then the situation will continue to provide near-term support to crude oil prices.”

In Houston, analysts with Raymond James & Associates Inc. said, “The broader markets ended last week on a downward note, falling 1% [July 6] after a disappointing US jobs report. Crude dropped 3% on the day [in the New York futures market], while natural gas lost 6% despite a bullish inventory report.” The SIG Oil Exploration & Production Index and Oil Service Index were down 1% each.

Ground blamed the lower oil markets partly on “disappointing nonfarm payrolls numbers [that] encouraged safe-haven dollar-buying which in turn weighed across the commodities complex.”

Over the weekend, Iran's request for another meeting of ministers from the Organization of Petroleum Exporting Countries to discuss crude prices “received some pushback from a number of the cartel's members, including Saudi Arabia,” Raymond James analysts reported.

Ground said, “Geopolitical risks affecting global oil supply are back on the radar again. In our view, the full scale of the Iranian sanctions is yet to be fully appreciated by the market. Meanwhile, economic growth in China and other major emerging economies are showing worrying signals; most of the global oil demand growth is expected to come from China and the other major [emerging markets]. Both considerations substantially increase the tail risks in oil prices. That said, on the balance of risks, we still see the current level as a very good opportunity for disciplined consumer hedging.”

Meanwhile, Raymond James analysts said reductions in both oil price and rig count forecasts puts pressure on realized NGL pricing and volumes. “Lower ethane prices will last for a longer period, until demand can reach equilibrium with significant supply growth. Given our depressed near-term gas outlook and recent significant reduction in forecasted West Texas Intermediate prices through 2013 (average 2013 WTI prices reflect a 22% revision vs. our prior model), we are lowering our realized weighted average NGL price estimates,” they said.

Raymond James officials said the average onshore rig count may decline 13% in 2013 due to a surplus supply of crude. As a result, they said, “WTI prices may need to fall far enough to drive the total US onshore rig count down 25% through the end of 2013. Under this scenario, we expect the ratio between NGL pricing and oil to remain depressed, as incremental newbuild ethylene capacity lags NGL production growth. In sum, we expect 1) ethane and propane will continue to exhibit a stronger correlation with weak natural gas prices (i.e., natural gas acts as a floor for light-end NGLs), and 2) heavier-end NGLs (i.e., n-butane, isobutane, natural gasoline) will reflect a higher correlation with weaker WTI oil prices (i.e., petrochemical and supply-demand fluctuations within refined petroleum products markets set heavy NGL prices in competition with oil-based substitutes).”

Energy prices

The August contract for benchmark US light, sweet crudes fell $2.77 to $84.45/bbl July 6 on the New York Mercantile Exchange. The September contract dropped $2.74 to $84.83/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.77 to $84.45/bbl.

Heating oil for August delivery declined 5.85¢ to $2.71/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 4.88¢ to $2.72/gal.

The August natural gas contract lost 16.9¢ to $2.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ to $2.92/MMbtu.

In London, the August IPE contract for North Sea Brent was down $2.51 to $98.19/bbl. Gas oil for July fell $20.25 to $863.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes declined $1.50 to $96.93/bbl. So far this year, OPEC’s basket price has averaged $111.47/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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