MARKET WATCH: Crude price slips slightly

The front-month crude contract slipped lower Apr. 3 on the New York futures market as the US Department of Labor reported US nonfarm payrolls fell 663,000 in March.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 6 -- The front-month crude contract slipped lower Apr. 3 on the New York futures market as the US Department of Labor reported US nonfarm payrolls fell 663,000 in March while the unemployment rate jumped to a 26-year high of 8.5% from 8.1%.

The revised January loss of 741,000 jobs was the worst since 1949. Net US job losses have surged to 5.1 million since the recession began.

Nevertheless, crude posted its seventh consecutive week of gains even as prices fell in three of last week's five trading sessions. A 9% price jump Apr. 2—the highest in 3 weeks—secured a 0.3% increase for the front month contract for the week. "May [North Sea] Brent is now at a premium to West Texas Intermediate and was up $1.49/bbl in the week," said Olivier Jakob at Petromatrix, Zug, Switzerland. Heating oil gained 23¢/bbl in the same period while reformulated blend stock for oxygenate blending (RBOB) lost 43¢/bbl. Natural gas increased by 1.71%.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "Overall, [crude] prices appear to be holding up quite well considering the $4/bbl gain on [Apr. 2] and the $18/bbl gains over the last 6 weeks." There appears to be renewed interest in the trade as the contango spread widened to $10-11/bbl over the next 12 months (or $4/bbl over 3 months), they said.

With US gas inventories 22% above the 5-year average, Pritchard Capital Partners said, "All eyes are focused on any sign of a return of industrial demand." Meanwhile, the number of LNG tankers sailing to Japan fell 47% in the last 2 weeks (from 34 to 18). Other declines included South Korea, from 13 to 12; and Spain from 4 to 5. Increases included Belgium from 2 to 6; UK from 2 to 3; US from 2 to 4; India from 2 to 3; China from none to 1.

In Houston on Apr. 6, analysts at Raymond James & Associates Inc. reported crude was trading lower premarket after leaders of the Group of 20—19 of the world's largest economies plus representatives from the European Union—agreed Apr. 2 in London to fund $1 trillion through the International Monetary Fund and other institutions to ease the global economic crisis.

"Today, Japan announced a new stimulus plan to inject an additional $100 billion into the economy, with the bulk of funds used to promote solar energy, medical services, and to boost ailing local firms," said Raymond James analysts. "This week, the market will be focused on first quarter earnings reports."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "Crude prices recently have been driven mainly by surging equity markets with increasing risk appetite on a growing belief that the US economy has bottomed. This has led investors to bid up oil prices on related hopes of rising demand for crude. Market euphoria was particularly evident…when world leaders at the G20 summit agreed to a sweeping package of measures to fight the global recession. But underlying oil market fundamentals show little sign of improvement. KBC continues to expect oil prices to move higher, but the prospects of an immediate further sustained increase are limited."

Meanwhile, Raymond James reported, "Jack up day rates have fallen 40% over the past 6 months." Analysts said, "In addition to rapidly declining demand, over 50 newbuilds are set to hit the water by the end of 2010, boosting supply by 15%."

As a result, they predicted, "Day rates will continue to fall unless a record number of jack ups are stacked. If the market is unwilling to stack the necessary amount, rates could reach cost-breakeven levels." The analysts see earnings-per-share among floater-oriented drilling contractors falling 15% in 2010, with the "more jack up-centric" contractors down more than 30%.

"Demand has screeched to a standstill, and leading-edge day rates have already fallen 40% below peak levels (currently $100,000/day)," said Raymond James analysts. "We model jack up day rates falling as low as $55,000 (or 60-70% below the peak), though still well above cost-breakeven day rates of $40,000/day. Our outlook for the jack up market is now substantially worse than Wall Street's view."

Energy prices
The May contract for benchmark US light, sweet crudes slipped by 13¢ Apr. 3 to $52.51/bbl on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., lost the same amount to the same finish. On NYMEX, the June contract gained 16¢ to $54.68/bbl. Prices for subsequent months increased and remained in contango. Heating oil for May delivery inched up 0.69¢ to $1.45/gal. RBOB for the same month climbed 2.26¢ to $1.49/gal.

The May natural gas contract increased 1.9¢ to $3.80/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped by 0.5¢ to $3.67/MMbtu.

In London, the May IPE contract for North Sea Brent crude was up 72¢ to $53.47/bbl. Gas oil for April lost $7.50 to $443.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.20 to $51.20/bbl on Apr. 3. So far this year, OPEC's basket price has averaged $43.27/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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