MARKET WATCH: Energy prices fall sharply as economy deteriorates

Energy prices fell sharply Mar. 2 with crude dipping below the psychological barrier of $40/bbl in intraday trading on the New York market amid signs that the recession is deepening.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 3 -- Energy prices fell sharply Mar. 2 with crude dipping below the psychological barrier of $40/bbl in intraday trading on the New York market amid signs that the recession is deepening in the world's major energy-consuming countries with no improvement in sight.

News of another US government bailout for American International Group—this one for $30 billion—undercut both the equity and futures markets across the board, with energy stocks and commodities faring the worst. AIG lost $61.7 billion in the latest quarter, the largest US corporate loss ever.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "Market action in the energy space had the feel of capitulation as crude oil prices fell a dramatic 10% in response to continued economic weakness around the world. This in turn pushed oil service stocks down 9.3% and exploration and production stocks off 11%."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Another wave of deleveraging hit the investment spectrum, and when losses are so abrupt across asset classes it is difficult to come with a single justification for each asset." He noted, "Even gold did not manage to hold its head above waters, leaving the dollar as the only place of refuge."

The Dow Jones Industrial Average "is making new lows and is still driving the sentiment, even though historical comparisons are somewhat irrelevant now as too many of the Dow constituents are technically bankrupt," Jakob said. As a result, industry and government reports this week of US inventories "will be crucial for the oil markets to decide if they can have a life of their own," he said.

In Houston, analysts at Raymond James & Associates Inc. reiterated, "Investors should expect more volatility until we get some sort of stabilization in the global economy."

Chesapeake Energy Corp.'s recent decision to cut its conventional drilling budget by 10% (25% of planned 2009 capital-expenditures) and curtail natural gas production by 240 MMcfd "is part of the solution," said Pritchard Capital Partners. "Bid-week prices for March in $2/Mcf levels are going to cause others to follow suit with cash costs below revenues per Mcf [equivalent] at points."

Analysts at the Centre for Global Energy Studies (CGES), London, said oil prices appear to have stabilized—"at least for the time being"—around $40/bbl for the OPEC basket of crudes. The average price for OPEC's basket of 12 benchmark crudes lost 32¢ to $42.98/bbl on Mar. 2.

"This is well below the level at which OPEC member-countries would like to see [prices], though. The output cuts agreed by OPEC in the final weeks of 2008, which were intended to push oil prices back up to levels more acceptable to the producers, have yet to be implemented in full, but it would appear that enough has been done to bring to an end the precipitate fall in oil prices that dominated the second half of 2008," said CGES officials.

Long lead times in the oil supply chain mean the impact of lower OPEC production will not start to affect surpluses in the Atlantic Basin until later this quarter, when the volumes of oil arriving at discharging terminals should begin to fall, CGES reported.

"Although crude oil stocks are high, the same is not true of product stocks, at least in the Atlantic Basin," said CGES analysts. "The drawdown of product stocks downstream from refineries in the fourth quarter may have exaggerated the level of oil demand destruction, since demand is measured at the refinery gate, not the final point of sale. Once this downstream stockdraw comes to an end, which may now have occurred, wholesalers will need to start buying products again to meet future demand, perhaps raising measured demand once again."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "On the surface, gasoline fundamentals appear positive due to low production and improving demand, and we think this could support refining margins over the next month. However, we remain concerned that supply will rise (both production and imports) to take advantage of the good gasoline margins, especially after refiner maintenance slows in April. Gasoline inventories are currently 3% below the 5-year average for this calendar week."

The Petroleum Administration for Defense District 5 (PADD 5) on the West Coast is the most positive area with gasoline inventories 16% below the 5-year average for this calendar week, while the Gulf Coast (PADD 3) is the most negative, with distillate stocks 29% above the 5-year mean, Rousseau reported.

Meanwhile, Algerian Oil Minister Chakib Khelil said the Organization of Petroleum Exporting Countries members' compliance with production cuts is now close to 100%, but a further reduction is needed because demand is falling faster than expected.

Energy prices
The April contract for benchmark US light, sweet crudes traded at an intraday low of $39.85/bbl Mar. 2 before closing at $40.15/bbl, down $4.61 for the day on the New York Mercantile Exchange. The May contract dropped $4.44 to $42.45/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.61 to $40.15/bbl. Heating oil for April delivery lost 11.63¢ to $1.15/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 8.63¢ to $1.29/gal.

Natural gas for the same month declined 4.6¢ to $4.15/MMbtu on NYMEX. "Prices fell for the first time in 3 days on concerns that industrial demand will slide more as the US economy deteriorates; bullish heating demand helped prices hold up as a severe winter snowstorm hit the northeastern US, and below-normal temperatures are expected to linger in the eastern third of the US through Mar. 6," said Pritchard Capital analysts.

On the US spot market, gas at Henry Hub, La., gained 36¢ to $4.40/MMbtu.

In London, the April IPE contract for North Sea Brent lost $4.14 to $42.21/bbl. The March contract for gas oil dropped $20.50 to $366/tonne.

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