Sam Fletcher
OGJ Senior Writer
HOUSTON, May 6 -- Energy prices plunged May 5 after the European Central Bank (ECB) indicated it would not raise lending rates, causing the dollar to escalate nearly 2% over the euro and undermining dollar-priced commodities in one of the worst days for that market in years.
The front-month crude contract fell 9% to less than $100/bbl in the New York market for the first time since March.
Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, said, “The collapse in oil prices this week is more a positioning event than a change underlying fundamentals. Indeed, US energy prices overall and gasoline prices specifically are not at the point of breaking the back of the economy in our view.”
Natural gas also dropped 7% on a “somewhat bearish” injection report. The Energy Information Administration reported May 5 the injection of 72 bcf of gas into US underground storage in the week ended Apr. 29. That boosted working gas in storage to 1.8 tcf, down 226 bcf from the year-ago level and 17 bcf below the 5-year average.
Sour US economic data also weighed on the energy market, said analysts in the Houston office of Raymond James & Associates Inc. However, they said, “After underperforming the commodities earlier in the week, energy stocks surprisingly held strong in the face of the meltdown, with the Oil Service Index and the SIG Oil Exploration & Production Index (EPX) falling only 2%, slightly underperforming the broader markets.” Oil and gas prices continued falling in early trading May 6.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted, “Oil products generally followed crude and moved sharply down. Term structures weakened only slightly, which suggests that the sell-off has been across the curve and has little to do with any significant changes in underlying supply and demand fundamentals. That said, we believe that the Brent term structure will weaken.”
He said, “The ECB president failed to mention the much-anticipated coded phrase, ‘strong vigilance,’ which tends to mean another rate increase in the following month. The euro duly fell by 1.9% against the dollar,…which dragged oil down. In addition, US weekly jobless claims unexpectedly jumped from 429,000 in the previous week to 474,000, a level last seen in August 2010. Although the US Labor Department cited ‘special factors’ not related to the economic situation for the jump in jobless claims, it added to the bearish sentiment and pushed the oil market down further.”
The euro “fell off a cliff yesterday,” but the pressure on oil prices had started before that, said Olivier Jakob at Petromatrix, Zug, Switzerland. “It might have been an input in terms of expectations but not in term of correlated trading market value,” he said.
The euro had entered “a zone where sustainability was at risk due to the strain it creates on the European export economy,” said Jakob. “One of the bearish triggers yesterday was the German manufacturing orders, which fell sharply by 4% vs. expectations of a small increase. It was thereafter probably not a coincidence that [ECB Pres. Jean-Claude Trichet] was suddenly mute about the next rate increase that would have given a further boost to the euro and choked Germany,” he said.
However, Jakob said, “The overall commodity pressure started this week with the collapse of silver and that correction continued as sharp as ever yesterday.”
Demand destruction
At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “The recent turnaround was provoked by the market’s suddenly waking up to the demand destruction that has been wrought by higher oil prices. Unless there is another disruption to oil supply, it seems that oil prices have hit the wall. At this time they may now depart from the broadly parallel movement in prices to 2008 and move to below the lofty levels of the last oil price bubble.”
They said, “There is growing evidence of oil demand destruction especially in the Organization for Economic Cooperation and Development and not least in the US. The EIA has recently revised down its assessment of US oil demand for February by a thumping 762,000 b/d, while earthquake-affected oil sales in Japan fell back by 5.3% in March. Total oil stocks are again rising in the US, and Saudi Arabia has been unable to place incremental crude volumes in the market. In a recent discussion with an executive of a US major, KBC was told “what keeps my CEO awake at night is fear of a demand shock this summer”. Indeed, it is beginning to look as though the loss of Libyan oil exports has now been offset not by alternative supplies but by a corresponding fall-back in the level of world oil demand under the pressure of (too) high prices.”
The terror premium
Although the announced assassination this week of Osama Bin Laden delivered a crippling blow to the al Qaeda terrorist organization, it retains the capacity to carry out lethal attacks. “There are now fears that the next few months could see a spate of new attacks in revenge for the Bin Laden killing,” said analysts at Barclays Capital Commodities Research
They said, “The Yemen-based franchise al Qaeda in the Arabian Peninsula is a source of particular alarm. The ongoing political crisis in Yemen is seen by US officials as sapping the [local] government’s counter-terrorism commitment.” Moreover, they said, “Saudi Arabia is nervously watching events in Yemen, as the country poses a direct threat to its security.”
Barclays Capital analysts reported, “Though out of the media limelight, the situation in Yemen’s oil industry has deteriorated steadily over the past few months, as well. The pipelines have come under attack various times, and on Mar. 14, the 270-mile pipeline from Marib to the Ras Isa export terminal in the Red Sea (capacity 300,000 b/d) was put out of service following a bomb attack.”
Raymond James analysts observed, “Some might be tempted to attribute this week's fall in crude on the lower geopolitical risk premium in the post-Bin Laden era, but really, do you see world peace breaking out—especially in the Middle East?” They advised, “[Chalk] this one up to over-levered paper traders.”
Jakob said, “Compared to a month ago we do believe that the geopolitical risks are today much better defined and command therefore less of a pricing factor for the weekend exposure. Libya has been written off the map of expectations, Syria cannot develop into anything major for oil supply and demand, and there are no specific immediate concerns over Saudi Arabia (has anybody seen a headline over Bahrain lately? It is off the map as well). With the flat price drop we can expect Iran to make some noise one way or another, as it is their way of supporting prices.”
On May 2 after the announced death of Bin Laden, Jakob said, “Iran tried to spin a story that Israeli jets were based and training in Iraq for an attack, but that spin did not work. To the contrary, some of the Iran-Israel risk premium might have been a bit defused yesterday when the Israeli defense minister made the statement that even if Iran did have a nuclear weapon, it would not use it against Israel. One could defend the opinion that with that statement and the death of Bin Laden it is some of the macro fears that are starting to erode.”
He pointed out, “Despite a revolution in Egypt, a bloodshed in Bahrain, a war in Libya, fears of street revolts in Saudi Arabia, a bloodshed in Syria, a continued liquidity injection by the US Federal Reserve [into the US economy,] the returns on passive long positions in West Texas Intermediate have provided so far in 2011 a return of 0.8%, and that is before commissions. The returns on a passive long position in Brent has provided a return of 16.4%, but that has fallen sharply as well (from 34% at the end of April).”
In other news, Sieminski said, “Chinese oil demand growth rates remain strong. We believe the absence of moderating growth rates will pose particular challenges to China's gas oil balance, raising the likelihood that China returns to being a net importer over the course of this year.”
He added, “The game-changing nature of shale gas plays for the global energy markets could result in US LNG exports and long-term downward pressure on natural gas prices in Europe and Asia.”
Energy prices
The June contract for benchmark US light, sweet crudes plunged a surprising $9.44 to $99.80/bbl after trading in a wide intraday range of $98.25-109.38/bbl May 5 on the New York Mercantile Exchange. The July contract tumbled $9.39 to $100.34/bbl. On the US spot market, WTI at Cushing, Okla., trailed the future market’s fall, down $9.44 to $99.80/bbl.
Heating oil for June delivery dropped 25.61¢ to $2.89/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month retreated 22.71¢ to $3.10/gal.
The June natural gas contract lost 31.6¢ to $4.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 17.5% to $4.41/MMbtu.
In London, the June IPE contract for North Sea Brent crude was down $10.39 to $110.80/bbl. Gas oil for May took a $60 plunge to $938.25/tonne. The end of the heating season in Europe “appears to have pushed gas oil stocks higher, and we expect the ICE gas oil structure to weaken further in order to incentivize storage,” Zhang said.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $4.16 to $112.80/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
