MARKET WATCH: WTI, Brent decline to 'psychological' lows

Oil prices rolled back again Mar. 4, with both West Texas Intermediate and North Sea Brent dropping below their “psychological thresholds” in intraday trading before climbing slightly above those levels prior to market closings.

The front-month benchmark crude contract in the New York futures market was down 0.6% for the day, but the front-month natural gas contract climbed 2.1% on “cooler-than-expected weather forecasts,” said analysts in the Houston office of Raymond James & Associates Inc. The Oil Service Index and the SIG Oil Exploration & Production Index followed crude down, losing 1.2% each.

Both WTI and Brent were up in early trading Mar. 5, “although surprisingly Brent is still finding upside a hard slog, despite an ongoing closure of a pipeline after an oil leak was detected on a North Sea platform,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

“Some support for the oil market is also coming from technical indicators, as both WTI and Brent trade around their respective 200-day moving average,” Ground said. “This might lead some analysts to believe that the recent fall has been too much and too fast.” But being skeptical of prevalent demand optimism, he said the lower price correction is warranted.

Meanwhile, Raymond James analysts reported, “The broader market continued its rise with the Standard & Poor’s 500 Index gaining 0.5% as hopes for continued US [economic] stimulus more than offset concern over negative economic data points from China.” Although China’s service sector expansion and factory growth continue, it is at the slowest pace in months. “The weak Chinese economic data put pressure on crude with WTI temporarily falling below $90/bbl,” they said.

Consultants with the PIRA Energy Group in New York expect oil prices to be “modestly negative” over the next few months. “A [lack of demand] growth scare is likely to develop from tax increases and spending cuts in the US and the political crisis in Italy,” they said. “The growth scare will inevitably fade, and second half economic growth is still forecast to be above trend.”

At least a third of the current year-on-year crude inventory surplus “is being used to ‘prime the pump’ for infrastructure growth and thus is not readily available to meet market needs,” PIRA analysts said. “Specifically, new Cushing, Okla., storage tank bottoms, storage growth at production sites, line fill, and operational storage for new or expanded pipelines make up a good portion of the surplus. It is unclear how much volume currently held in railcars is in the reported stock number.”

Despite forecasts of colder March weather in the US, oil inventories remain adequate “with the possible exception of the New England region,” they said. “Higher exports will certainly help work off some of the Gulf Coast's excess propane stocks. In Europe and Asia, propane markets remain steeply backwardated over the next several months, with the curve shifting toward contango to accommodate the need to prepare for storage building, given the expected extra cargo flows.”

US ethanol prices fell slightly in February, generally tracking lower corn costs. “Prices and margins are expected to rise, and more plants will restart soon,” PIRA analysts predicted. “However, corn availability will be a problem for some companies in the second and third quarters, and many producers will have to wait for the new crop and anticipated lower corn prices in the fourth quarter before seeing a rebound in margins.”

Energy prices

The April and May contracts for benchmark US sweet, light crudes lost 56¢ each on Mar. 4 to $90.12/bbl and $90.58/bbl, respectively, on the New York Mercantile Exchange. The April contract temporarily dropped to $89.33/bbl in intraday trading. On the US spot market, WTI at Cushing also was down 56¢ to match the closing price of the front-month crude futures contract.

Heating oil for April delivery declined 1.1¢ to $2.92/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 3.03¢ to $3.10/gal.

The April natural gas contract climbed 7.3¢ to $3.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.1¢ but closed at a rounded 3.54/MMbtu for the fourth consecutive session.

In London, the April IPE contract for Brent temporarily dropped to $109.58/bbl in intraday trading before closing at $110.09/bbl, down 31¢ for the day. Gas oil for March decreased $1.50 to $919/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes continued to slump, down 69¢ to $106.10/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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