MARKET WATCH: Energy prices drop sharply

March 18, 2008
Energy prices dropped sharply on Mar. 17 with the front-month crude contract falling more than $4/bbl, or 4.1%, yet still remaining above $105/bbl.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 18 -- Energy prices dropped sharply on Mar. 17 with the front-month crude contract falling more than $4/bbl, or 4.1%, yet still remaining above $105/bbl.

That drop may have been caused by profit taking after more than a week of consecutively record-setting prices or by hedge funds repositioning investments, but it was not based on any noticeable changes in market fundamentals of supply and demand, analysts said. Nevertheless, said analysts Mar. 18 at the Houston office of Raymond James & Associates Inc., "Commodities have rebounded this morning in anticipation of the Federal Reserve cutting its benchmark interest rate by as much as 100 basis points today. This will mark the deepest interest rate cut in a generation as the central bank struggles to prevent a meltdown in financial markets and a recession."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Commodities have given strong returns to financial institutions, but given the current run for cash and the over-valuation of some commodities, we will watch for continued profit taking." He said the flow of investors' money from the equity to the commodity markets has "created such a destruction of oil economics" that it now "safer to play any [weak] dollar or inflation trade on gold rather than oil." Indeed, on Mar. 17, Comex gold for March delivery closed above $1,000 for the first time at $1,001.40/troy oz on the New York market.

Separately, Renewable Energy Group, one of the largest US producers of biodiesel, filed Mar. 17 to withdraw its initial public offering, "underscoring the difficult environment for biofuels," said Raymond James analysts. The company had filed last July to go public. "At the time, the price of soybean oil (the main feedstock for US biodiesel) was about 38¢/lb. Since then, it has soared to more than 60¢/lb. Current cash margins for soybean oil-based biodiesel producers are zero to negative vs. ethanol margins that remain positive, albeit slim. In this environment, a biodiesel company's access to cheaper feedstock (palm oil, animal fats, etc.) is essential for profitability," said Raymond James analysts. They noted that Imperium Renewables, another major biodiesel company, pulled its IPO proposal in January.

Also, a UK court lifted the injunction against Petroleos de Venezuela SA that ExxonMobil Corp. obtained in January to freeze $12 billion of PDVSA's assets pending settlement of a dispute over the nationalization of ExxonMobil's heavy oil holdings in Venezuela (OGJ Online, Mar. 5, 2008).

Energy prices
The April contract for benchmark US sweet, light crudes dropped $4.53 to $105.68/bbl Mar. 17 on the New York Mercantile Exchange but not before hitting a new intraday high of $111.80/bbl. It was the biggest 1-day loss in that market since January 1991 when the US opened its strategic reserves of crude at the start of its invasion of Kuwait to drive out Iraqi forces. It was also the largest percentage drop since Aug. 6. The May contract fell $4.51 to $104.23/bbl. On the US spot market, West Texas Intermediate was down $4.53 to $105.68/bbl. The April RBOB contract dropped 18.52¢ to $2.50/gal on NYMEX. Heating oil for the same month lost 7.81¢ to $3.07/gal.

The April natural gas contract had an impressive loss of 76.8¢ to $9.10/MMbtu. On the US spot market, gas at Henry Hub, La., fell 27.5¢ to $9.60/MMbtu.

In London, the May IPE contract for North Sea Brent crude declined by $4.45 to $101.75/bbl. The April gas oil contract dropped $40.25 to $957.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $1.47 to $101.41/bbl on Mar. 17.

Contact Sam Fletcher at [email protected].