MARKET WATCH: Energy market pessimism pushes prices down

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 6 -- The front-month crude contract price fell Mar. 5 from a 5-week high after the US Department of Labor reported first-time unemployment applications topped 600,000 for the fifth consecutive week.

"There was heavy selling pressure throughout the day driven by a (3.3%) broad market decline and further evidence the global recession is worsening," said analysts at Pritchard Capital Partners LLC, New Orleans.

DOL officials said 639,000 people requested unemployment benefits, down from 670,000 the previous week. Analysts had expected a smaller drop to 650,000. Meanwhile, the US Department of Commerce said factory orders fell in January for a record sixth consecutive month. Retailers reported sales fell in February but at a slower pace than previously (OGJ Online, Mar. 5, 2009).

In another report Mar. 6, Labor officials said the US unemployment rate increased to 8.1% in February, the highest rate since late 1983.

However, crude was selling at a higher price in premarket trading Mar. 6 "after Chinese officials announced China's domestic economy was recovering and the nation's 8% growth target for 2009 was within reach. In addition, if its current $585 billion spending plan does not prove sufficient, then the Chinese government stands ready to instigate more stimulus packages when necessary," said analysts at Raymond James & Associates Inc. in Houston.

In Zug, Switzerland, Olivier Jakob at Petromatrix noted "quite strong changes in the relative values" on the Mar. 5 market. "First of all the [North Sea] Brent premium to West Texas Intermediate has quickly evaporated and reversed to a WTI premium over Brent. Stocks in Cushing[, Okla.,] have been slightly reduced, the North Sea is destocking but in that process putting some pressure on differentials," he said. Jakob pointed out that the May-June contango roll "is now less on WTI than on Brent."

OPEC rebuttal
In a recent interview with Reuters news service, International Energy Agency Executive Director Nobuo Tanaka said a $40/bbl oil price through 2009 would have the effect of a $1 trillion stimulus to the world economy.

Abdalla Salem El-Badri, OPEC's secretary general, replied in a Mar. 6 statement, "The moderation of prices since last summer's extreme certainly offers some short-term relief to consumers. However, if the current low price environment persists, this short-term relief may not translate into long-term gain."

Badri said, "Oil prices need to be at levels to help sustain economic growth, by supporting longer-term energy industry investments across the board. Each energy source, each technology, and each project, has a price when it is viable; and a price when it is not. Low oil prices inevitably mean less investment."

To avoid future shortages, IEA wants OPEC to invest in exploration and development projects "that are not economically viable at these prices," Badri said. "It is a short-sighted view."

He noted, "The IEA has encouraged the US to take advantage of lower oil prices by considering new taxes on fuel." However, Badri said, "Raising taxes can be to the detriment of both oil producers and consumers. From the consumer's perspective, higher taxes translate into higher prices at the pump. This impacts individuals and does little to instill consumer confidence in the current economic climate. For producers, they create further uncertainty for long-term planning in an already distorted price environment and volatile market."

Energy prices
The April contract for benchmark US light, sweet crudes fell $1.77 to $43.61/bbl Mar. 5 on the New York Mercantile Exchange. The May contract dropped $1.54 to $45.66/bbl. On the US spot market, WTI at Cushing was down $1.77 to $43.61/bbl. Front-month contracts for petroleum products saw gains from the previous session wiped out, with heating oil for April losing 5.47¢ to $1.16/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 6.89¢ to $1.31/gal.

Natural gas for the same month fell 25.2¢ to $4.09/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 3¢ to $4.24/MMbtu. Pritchard Capital analysts said, "Industrial demand [for gas] continues to look weak as the economy struggles."

EIA earlier reported the withdrawal of 102 bcf of natural gas from US underground storage in the week ended Feb. 27 (OGJ Online, Mar. 5, 2009). "The below-average withdrawal occurred due to lower industrial demand despite colder-than-normal temperatures across much of the US," said Pritchard Capital.

In London, the April IPE contract for North Sea Brent crude was down $2.48 to $43.64/bbl. Gas oil for March dropped $16.25 to $366/tonne.

The average price for OPEC's basket of 12 reference crudes inched up 8¢ to $43.87/bbl on Mar. 5.

Contact Sam Fletcher at [email protected].