MARKET WATCH: Crude hits lowest level of year in New York market

Energy prices plunged Apr. 15 for the third consecutive session with the front-month crude contract dropping 2.8% to its lowest closing this year. “Not even export-restricted natural gas could buck the trend, falling 2% on the broad-based commodity sell-off,” said analysts in the Houston office of Raymond James & Associates Inc.

The equity market also suffered its worst session of this year in reaction to growth in China’s gross domestic product slowing to 7.7% in the first quarter of this year from 7.9% in fourth quarter of 2012. The general consensus was for an 8% increase. The Standard & Poor’s 500 Index fell 2.3%. The Oil Service Index and the SIG Oil Exploration & Production Index followed the broader markets down, falling 4.3% and 5.7%, respectively.

Raymond James analysts reported, “Gold prices dropped 8.5%, or $126/oz, in the largest 1-day drop in history.” However, investors started selling gold Apr. 12 before news of the slowdown in China’s economy and after the US government reported a drop in inflation. Investors typically buy gold when prices and inflation are on the rise and sell it as inflation diminishes.

Meanwhile, the equity market was up in early trading Apr. 16 following a report US home construction last month was at the highest level since June 2008. Commodities markets also appeared to stabilize, although crude was trading lower.

Nevertheless, the downturn in China’s economic growth “perhaps got many thinking whether more downside is in the offing for the coming quarters,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “In addition, the upward trajectory of inflation adds further uncertainty as it begs the question as to how authorities (particularly the People's Bank of China) might respond if faced with a ‘stagflationary’ bind, i.e. poor growth and rising inflation.”

Barclays Capital Commodities Research analysts said, “While we do not rule out further weakness [in the price of North Sea Brent crude] in the near term, we do not see prices acclimatizing below the $100/bbl mark past the second quarter. Progressing through the tail end of the second quarter and into the second half of 2013, we see strong indications for demand growth developing, which will keep the call on crude elevated.”

They noted, “A combination of refinery maintenance, weak margins capping utilization rates, as well as improved supply availability in the Atlantic basin, has already been adding pressure at the prompt for crude. The trigger for the [potential] move below $100/bbl, however, came from a packed tide of cross currents from sell-offs in other asset classes, along with the recent stream of poor macroeconomic data from the US and China. Over the April to May period, we expect oil market fundamentals alone to offer very few catalysts for an immediate upside retracement.

Possible price supports

Until fundamentals rebound, Barclays Capital analysts said, “The pace of fall on the downside is likely to be slow, and we highlight three layers of immediate support on the fundamentals side that will support prices.” They expect the first support level to come from “several consumers” now waiting on the sidelines for a better entry point for their hedging programs. “We see a pick-up in hedging activity on the first leg of downward adjustment from current levels,” they said.

The second layer of support likely will come from market expectations surrounding comfort levels of those members of the Organization of Petroleum Exporting Countries who continue producing above target levels when prices drop below the $100/bbl OPEC officials have said is “appropriate” for both consumers and producers. “While actual output by OPEC producers is likely to react only to a prolonged state of weakness in prices below their comfort level, the further it moves from the $100/bbl mark, the more the market is likely to gauge these factors,” the analysts said.

The third layer of support is expected to come from cost curves, “which once again are unlikely to be brushed (at least for the high-cost marginal producers relying on discounted differentials from Brent) until the $90/bbl mark is touched,” Barclays Capital analysts said. “However, the likelihood of such an extreme weakness can be ruled out for now, in our view.”

Energy prices

The May and June contracts for benchmark US sweet, light crudes fell $2.58 each to $88.71/bbl and $89.03/bbl, respectively, Apr. 15 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also lost $2.58, to $88.71/bbl.

Heating oil for May delivery continued declining, down 4.26¢ to $2.83/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 4.42¢ to $2.76/bbl.

The May natural gas contract dropped 8.5¢ to $4.14/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued climbing, however, up 2.9¢ to $4.24/MMbtu.

In London, the May IPE contract for North Sea Brent fell $2.72 to $100.39/bbl. Gas oil for May lost $8.75 to $847.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $2.07 to $98.56/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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