MARKET WATCH: Volcanic fallout drops crude to 3-week low

April 20, 2010
Energy prices fell Apr. 19 with crude down for the third consecutive session to a 3-week low in the New York market, led by a drop in heating oil as ash from the erupting Eyjafjallajoekull volcano in Iceland shut down air traffic in Europe for nearly a week.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 20 -- Energy prices fell Apr. 19 with crude down for the third consecutive session to a 3-week low in the New York market, led by a drop in heating oil as ash from the erupting Eyjafjallajoekull volcano in Iceland shut down air traffic in Europe for nearly a week.

Market analysts said fallout of volcanic ash has grounded many commercial flights in Europe, reducing world demand for jet fuel by at least 1 million b/d.

The front-month crude contract, which is to expire at the close of the Apr. 20 regular session on the New York market, fell 5.1% over the past three sessions, the largest 3-day decline since early February. Crude “is now 6% below its 17-month high reached on Apr. 6,” said analysts in the Houston office of Raymond James & Associates Inc.

The crude price was up 1% in early trading Apr. 20, as several commercial flights resumed when the volcano’s ash plume appeared to shrink. But there is a massive backlog of stranded passengers, and London’s airports remained shut. “A new cloud of ash will make the process slower than expected, and a return to the worse can not yet be excluded. We will continue to monitor the evolution of the unpronounceable volcano because any new air traffic interruption will put a downward risk on oil prices,” said Olivier Jakob at Petromatrix, Zug, Switzerland. A stronger US dollar also helped push down energy prices.

Jakob said, “Up to now the focus has been mostly on the amount of lost jet demand. There is, however, also a financial risk linked to the airlines’ [fuel futures] hedges that will need to be considered if there is any further interruption. European airlines, like most other airlines…suffered in the fourth quarter of 2008 when loss of traveling due to the [financial] crisis went with lower oil prices, which translated in red numbers in the hedges. Some airlines were then forced to sell back their hedges which brought prices even lower.”

As a result, he said, “Many airlines then slowed down or did not hedge in the first quarter of 2009 and started to hedge back mostly in the second half of 2009. However, the financial losses linked to the hedges of 2008 were so great that they have used in the process a good portion of their hedging cash lines. If the volcano was to again disrupt air travel, European airlines could find themselves in the same situation as in 2008: unexpected loss of demand and lower oil prices which would pressure them to liquidate some of their hedges. We need to keep in mind that the oil price correction in the second half of January 2010 occurred while the Japan Airlines hedges were being sold (bankruptcy).”

Jakob said, “The other risk to consider is that the cloud of ash has now also reached the East Coast of North America, touching St. John, Newf. The amount of ash there should not be enough to disrupt traffic, but on any renewed volcanic activity we would need to consider that depending on the wind this is not necessarily just a European affair.”

Meanwhile, he said, “There is a volcano of [a financial] nature still brewing in Greece, and it should reattract some focus in the second part of the week.”

Energy prices
The May contract for benchmark US light, sweet crudes traded at $80.53-83.00/bbl Apr. 19 on the New York Mercantile Exchange before closing at $81.45/bbl, down $1.79 for the day. The June contract dropped $1.54 to $83.13/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.79 to $81.45, in step with the futures market. Heating oil for May delivery fell 6.01¢ to $2.16/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.26¢ to $2.25/gal.

The May natural gas contract lost 9.5¢ to $3.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 10.5¢ to $4.02/MMbtu.

In London, the June IPE contract for North Sea Brent crude dropped $1.76 to $84.23/bbl. Gas oil for May fell $17.75 to $687.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $1.97 to $80.89/bbl.

Contact Sam Fletcher at [email protected].