MARKET WATCHStronger dollar pushes crude futures price to 3-month low

March 24, 2005
Energy commodity prices plunged Mar. 23 as speculators, particularly institutional investors, pulled out of that market following a resurgence in the value of the US dollar against other major currencies.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 24 -- Energy commodity prices plunged Mar. 23 as speculators, particularly institutional investors, pulled out of that market following a resurgence in the value of the US dollar against other major currencies.

In a report issued the same day, Paul Horsnell, Barclays Capital Inc., London, observed that recently speculative "unhedged money flows have swung heavily to the long side of the market" where investors who buy crude futures contracts are obligated to take delivery at expiration. "In all, the rapid build up in those positions leads us to expect that a move down could gain some momentum once set in progress," Horsnell said.

The sell off by speculators was encouraged by a report by the Energy Information Administration that commercial US crude inventories shot up by an unexpected 4.1 million bbl to 309.3 million bbl in the week ended Mar. 18 (OGJ Online, Mar. 23, 2005). However, US gasoline stocks plunged by 4.1 million bbl to 217.3 million bbl in the same period, while distillate fuel stocks fell by 2.8 million bbl to 104.5 million bbl.

That indicates that US demand remains strong and is led by distillates, said Horsnell. "The key Mid-Atlantic States are now running pretty empty, below 10 million bbl of heating oil," he said. US gasoline demand is averaging nearly 9.1 million b/d so far this month, 163,000 b/d higher than a year ago despite a strong spike in retail prices.

"The only real weakness in the latest data lies on the crude oil side, where inventories have just started to climb faster than normal from the already higher than normal base. This is an almost inevitable result of there having been a consistent 60-70¢ contango [with futures market prices in succeeding delivery months progressively higher than in the nearest delivery month]," Horsnell said. "Until that contango is shocked away, there will be continuing pressure to build relative to normal because of cash-and-carry arbitrage."

Energy prices
The May contract for benchmark US sweet, light crudes plunged by $2.22 to $53.81/bbl Mar. 23 on the New York Mercantile Exchange. That was the biggest loss by a front-month contract in 3 months and followed a loss of $1.43/bbl in the previous session. The June contract lost $1.98 to $54.74/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., retreated to $50.36/bbl from a corrected price of $54.04/bbl the previous day. Heating oil for April delivery declined by 1.3¢ to $1.53/gal on NYMEX. Gasoline for the same month settled at $1.57/gal, unchanged for the day, after spiking to a 22-year high of $1.59/gal following a fire and explosion Mar. 23 at BP PLC's 446,500 b/d Texas City refinery, the third largest in the US. That refinery is still in operation, however.

The April natural gas contract dropped by 11¢ to $7.09/MMbtu on NYMEX, "pressured by a sharp sell off in crude oil prices and in the entire energy complex, with moderate weather forecasts for next week," said analyst at Enerfax Daily. On Mar. 24, EIA reported 89 bcf of natural gas withdrawn from US underground storage in the week ended Mar. 18. That was below the consensus of Wall Street analysts and compares with draws of 95 bcf the previous week and 65 bcf a year ago. With 2 weeks remaining in the winter heating season, US gas storage totaled 1.28 tcf, up by 249 bcf from a year ago and 232 bcf above the 5-year average.

The latest EIA data appear "to reflect some incremental backed-out demand vs. the prior week, although additional data points are need to fully discern whether there has been a real shift in the supply-demand balance at this juncture," said Robert S. Morris, Banc of America Securities, New York.

In London, the May contract for North Sea Brent crude lost $1.55 to $53.04/bbl on the International Petroleum Exchange.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes fell by $1.94 to $49.09/bbl Mar. 23.

Contact Sam Fletcher at [email protected]