MARKET WATCH: Crude oil prices dive in unexplained selloff

The front-month crude oil contract fluctuated within a $5/bbl range Sept. 17 in the New York market before dropping 2.4% at closing, perhaps partly on unsubstantiated rumors of an imminent release of oil from the US Strategic Petroleum Reserve.

The abrupt selloff prompted President Barack Obama’s administration to announce it has made no decision to release SPR crude. Meanwhile, front-month natural gas fell 2.7% on forecasts for mild weather during the next 2 weeks. Weak oil and gas prices resulted in underperformance of the Oil Service Index and the SIG Oil Exploration & Production Index, down 1.4% and 2.1%, respectively, compared with only a 0.3% decline in Standard & Poor’s 500 Index. Oil and gas prices were still in retreat in early trading Sept. 18.

The selloff “saw both Brent and West Texas Intermediate tumble around $4/bbl in a matter of minutes,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

The market is still trying to figure out what triggered the selloff, absent any specific news or event. “The obvious culprit is some kind of technical trading glitch or a ‘fat finger’ error, which the Commodity Futures Trading Commission and IntercontinentalExchange Inc. are now investigating. However, prices did not really recover after the selloff and continue to trade some $2-3/bbl down on yesterday’s pre-selloff average. Usually, such technical glitches or trader errors see an equally quick recovery, something absent in yesterday’s trading pattern,” Ground reported.

“Whatever the reason for yesterday’s move, it does highlight the vulnerability of crude oil markets,” he said. “For now we feel that the situation in Iran, together with the Federal Reserve’s additional monetary accommodation, should keep the crude oil market well supported. However, we remain cognizant that the supply situation looks to be improving and [there is a] very real risk of an SPR release, given persistently elevated product prices.”

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. are “slightly lowering our near-term outlook for US drilling activity while slightly raising our 2013 outlook for US activity.” They cautioned, however, “We still are expecting a steep decline in drilling activity, and our 2013 US rig forecast is still much lower than consensus expectations. Our negativity for next year is predicated on the belief that rising US oil production in the face of weaker global oil demand growth will drive oil prices substantially lower in 2013. As a result, we believe that US drilling activity will follow E&P cash flows lower next year. We now believe that the 2012 rig count will average 1,930 rigs. This is down 15 rigs (or roughly 0.75% lower) than our old forecast. Perhaps more importantly, we are now expecting the 2013 rig count will average 1,720 rigs, which is down 11% from our 2012 average rig count assumption but up 1% from our old forecast.”

In other news, the National Association of Home Builders-Wells Fargo index released Sept. 18 showed confidence among US homebuilders increased to 40 in September from 37 in August and is the highest reading since June 2006. However, any reading below 50 indicates a negative sentiment.

Energy prices

The October and November contracts for benchmark US sweet, light crudes fell $2.38 each to $96.62/bbl and $96.95/bbl, respectively, Sept.17 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was down $2.38 to $96.62/bbl.

Heating oil for October delivery lost 7.61¢ to $3.16/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 7.23¢ to $2.94/gal.

The October natural gas contract continued its retreat, down 7.8¢ to $2.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 10.4¢ to $2.79/MMbtu.

In London, the November IPE contract for North Sea Brent fell $2.87 to $113.79/bbl. Gas oil for October decreased $3 to $1,010.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.15 to $113.72/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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