MARKET WATCH: Energy prices resume downward spiral

Energy prices resumed their steep downward spiral Feb. 17 amid more indications of continued global economic stress.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 18 -- Energy prices resumed their steep downward spiral Feb. 17 amid more indications of continued global economic stress.

In Houston, analysts at Raymond James & Associates Inc. said oil was flat in premarket trading Feb. 18, following a 7% drop to below $35/bbl on Feb. 17. "Weak economic indicators and their impact on energy demand, as well as a stronger dollar continue to pressure oil prices. With Cushing, Okla., inventories nearly full, expect to see the March crude contract, which expires [Feb. 20], to trade with increased volatility. The April contract premium has narrowed from $8/bbl last week to trading just under $4/bbl currently," they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, "Fears that Western Europe would not have the capacity to answer a potential financial crisis in Eastern Europe made the euro fall from a cliff (and [caused] a surge in the dollar index), which then led to commodities being hit by the [stronger] dollar and financial shares taking another hit and leading to renewed selling in equities that are now down to testing the November lows (on the Dow Jones Industrial Average but not yet on the S&P 500 Index)."

Most of the price decline for benchmark US crude occurred "before the open of the floor session in the New York market," Jakob said. "Likewise in equities, most of the drop was concentrated in the first 10 min, the rest of the session being mostly flat," he said. "Despite the flat price weakness on crude oil, the contango on the expiring spread continues to narrow, in a pattern very similar to the previous expiry."

Jakob said, "The convergence of the expiring contract is now being done preexpiry on a narrowing of the spread rather than postexpiry on a flat price basis. This reenforces our view that the extreme contango on the West Texas Intermediate contract is primarily due to market distortions…."

In New Orleans, analysts at Pritchard Capital Partners LLC noted, "The $35/bbl level has more or less held over the past 3 months, and the price action of yesterday is an important test of that level." Because of the Feb. 16 Presidents' Day holiday, the Department of Energy's weekly petroleum inventory report will be released Feb. 19. That, Pritchard Capital Partners said, "will most likely be the determining factor as to whether the $35/bbl level will hold."

Jakob said, "Given that equities are sitting at a crucial test of support, it will be difficult for oil futures to have a real life of their own without some visible stock reduction in the US weekly statistics."

Meanwhile, the New York Federal Reserve Bank reported manufacturing activity in the New York area contracted at a record pace to –34.7 in February from –22.2 in January. It was said to be the largest decline since 1974.

In other news, gunmen unsuccessfully attacked an ExxonMobil Corp. installation in the delta region of Nigeria. The militant Movement for the Emancipation of the Niger Delta has given Agip SPA and Saipem SPA until Feb. 20 to leave the region.

Energy prices
The March contract for benchmark US light, sweet crudes fell $2.58 to $34.93/bbl Feb. 17 on the New York Mercantile Exchange. The April contract dropped $3.43 to $38.54/bbl. On the US spot market, WTI at Cushing was down $2.58 to $34.93/bbl. Heating oil for March delivery lost 11.36¢ to $1.19/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) declined by 9.45¢ to $1.11/gal.

Natural gas for the same month dropped 24.9¢ to $4.20/MMbtu on NYMEX. That closing price "represents a new low for the commodity since the sell off began in July of 2008," said Pritchard Capital analysts said, adding, "The price action of both crude oil and natural gas indicate as of now the market is not giving the Obama administration's stimulus plan a huge vote of confidence." On the US spot market, gas at Henry Hub, La., lost 22.5¢ to $4.37/MMbtu.

In London, the April IPE contract for North Sea Brent was down $2.25 to $41.03/bbl. The March contract for gas oil lost $19.25 to $379/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes dropped $1.50 to $39.89/bbl on Feb. 17.

Contact Sam Fletcher at samf@ogjonline.com.

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