MARKET WATCH: Crude drops $4/bbl in mixed market

April 1, 2008
The New York market's front-month crude contract fell more than $4/bbl Mar. 31 as traders sold off a wide range of commodities in apparent profit taking at the end of this year's first quarter.

Sam Fletcher
Senior Writer

HOUSTON, Apr. 1 -- The New York market's front-month crude contract fell more than $4/bbl Mar. 31 as traders sold off a wide range of commodities in apparent profit taking at the end of this year's first quarter.

"The confluence of profit taking, a firming US dollar, and expectations of an increase in US inventories caused crude oil to fall nearly 4%," reported analysts in the Houston office of Raymond James & Associates Inc. "Crude inventories have been building steadily during the year and are expected to increase for the 11th time in 12 weeks as fuel demand slows."

The crude futures price rebounded above $106/bbl in early money market trading Mar. 31 as the US dollar slipped to a low of $1.5895 against the euro. By the time the market closed, however, the dollar managed to lead both the euro and the yen; when the dollar rises in value, crude prices usually fall. In addition, a Shiite truce offer has for the moment reduced fighting between government forces and dissident militia in Iraq.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "West Texas Intermediate started [Mar. 31] by trading the dollar correlation but then got taken over by the cross commodity liquidation." WTI is basically back to the price levels of a week ago, Jakob said. "The dollar still holds one of the main keys to decide on which side of $100/bbl we go to. The euro tried and failed to break $1.59 [Mar. 31] and has faced continuous resistance at $1.5850," he said. "On the support side for oil, there has been overnight report of fires on Bonny pipelines in Nigeria, and developments there will need to be monitored."

However, some analysts said the end-of-quarter trading likely distorted the results of that session. And veteran market observers now are reluctant to put too much value on large 1-day moves in the market, which have become more frequent in recent months. Even with the large price drop on Mar. 31, crude prices still were 5.8% higher than at the start of the quarter, having hit a record high of $111.80/bbl in March prior to retreating.

Crude prices "were surprisingly strong" in the first quarter, said Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. "WTI averaged a record $98/bbl, well above our $75/bbl December 2007 estimate, due to a midquarter surge in prices, ostensibly driven by fund flows into the commodity," Bernstein said. "Henry Hub, La., natural gas averaged $8.60/MMbtu, also exceeding our $7.25/MMbtu expectation. However, our US average refining margin indicator fell short of expectations (only $10.55/bbl) as excess gasoline inventories weighed on margins."

Bernstein said, "We are raising our 2008 crude oil price forecast from $80/bbl to $90/bbl to reflect the [first quarter] actual price and a $95/bbl projection for the second quarter. We maintain our $85/bbl second half 2008 and long-term crude oil price forecast, which assumes prices revert to more normalized levels."

Energy prices
The May contract for benchmark US sweet, light crudes fell $4.04 to $101.58/bbl Mar. 31 on the New York Mercantile Exchange. The June contract lost $3.82 to $101.09/bbl. On the US spot market, WTI at Cushing, Okla., was down $4.04 to $101.59/bbl. The expiring April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 10.07¢ to $2.62/gal on NYMEX. The expiring heating oil contract for the same month fell 5.58¢ to $3.05/gal.

However, the May natural gas contract jumped 30.1¢ to $10.10/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 49.5¢ to $9.94/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost $3.47 to $100.30/bbl. But the April gas oil contract gained $7 to $969/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped $1.14 to $98.63/bbl on Mar. 31.

Contact Sam Fletcher at [email protected].