MARKET WATCHCrude prices approach 2-week low

March 6, 2007
A slide in Asian and European stock markets triggered a drop in crude prices to near 2-week lows Mar. 5 in the New York commodity market.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 6 -- A slide in Asian and European stock markets triggered a drop in crude prices to near 2-week lows Mar. 5 in the New York commodity market.

Coming on the heels of the Mar. 1 fall in equity prices on the Shanghai Composite Exchange, the latest market losses increased fears of a global economic weakness that could adversely affect oil demand.

However, crude futures prices were up slightly in early trading Mar. 6 "on a rebound in the global markets and forecasts of a drop in gasoline inventories in the US," said analysts in the Houston office of Raymond James & Associates Inc. They reported a spill at a major pipeline in the Niger Delta forced Royal Dutch Shell PLC to shut in 10 flow stations in Nigeria, resulting in a production disruption of 187,000 b/d. "The cause of the spill and the time to restore operations is unknown," analysts said.

All energy commodity prices other than natural gas fell Mar. 5 "as the energy complex could not resist the continued equity pressure," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "There was probably as well some margin-call repositioning as evidenced by a falling open interest in crude oil," he said.

"The pressure is exogenous to oil and coming from a lack of confidence rather than lack of growth; hence we still believe that it would be wrong to become overly negative on oil demand on the back of the recent equity correction," said Jakob. Moreover, he said, "The pressure on oil has come mainly during the after hours rather than within the main trading session, so we remain unconvinced about the strength of the correction."

He said, "The equity fall down is starting to show signs of some bottoming, which should help the oil market to refocus on issues such as [United Nations] sanctions on Iran or the recent loss of Nigerian production from Shell.

Meanwhile, Jakob said sales resistance at a price of $59.70/bbl "has proven to be a strong support" for crude futures prices for the past nine trading days on the New York Mercantile Exchange. "On an intraday basis $61/bbl might provide some [upside] resistance, but the stronger one will come on attempts at breaking out of the newly defined $59.50-62.50/bbl range," he said.

US oil demand down
The Energy Information Administration said Mar. 5 in its December monthly report that US oil demand declined in 2006 for the first time since 2001, down 105,000 b/d to 20.697 million b/d for the year—the biggest drop since 1991, despite record demand for gasoline and distillate fuel.

Despite a 13.3% jump in gasoline pump prices during 2006, US demand for gasoline increased by 74,000 b/d to a record 9.233 million b/d in 2006. It was the 15th consecutive monthly increase in gasoline demand and the first time it averaged above 9.2 million b/d for the full year. Total distillate demand increased for the fourth consecutive month, up by 54,000 b/d—the smallest increase in that period—to 4.172 million b/d, the highest distillate total in any year. Combined demand for ultralow-sulfur and low-sulfur diesel increased 5.7% to 3.2 million b/d, the largest total since 1994.

US demand for jet fuel fell 3.3% to 1.6 million b/d, the smallest level of demand since 2003. Use of heavy residual fuel was down a record 26%.

"Overall US petroleum stocks have been reduced by 66 million bbl in the fourth quarter but remain 19 million bbl over last year due to the build in the previous quarters. It is still the largest reduction of US stocks in a fourth quarter since 1999, and crude oil stocks at the end of December were 14 million bbl below December 2005, but 7 million bbl higher in gasoline and 8 million bbl higher in middle distillate. Overall demand in December remained subdued due to the warm start of winter, but the year-on-year lower comparison is mainly due to residual fuel oil," Jakob said.

Energy prices
The April contract for benchmark US sweet, light crudes fell by $1.57 to $60.07/bbl Mar. 5 on NYMEX. The May contract dropped $1.47 to $61.30/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.57 to $60.08/bbl. Heating oil for April delivery lost 4.34¢ to $1.72/gal. The April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 5.71¢ to $1.84/gal.

The April natural gas contract inched up by 1.1¢ to $7.25/MMbtu, however. On the US spot market, gas at Henry Hub, La., escalated by 12¢ to $7.35/MMbtu.

In London, the April IPE contract for North Sea Brent crude dropped $1.54 to $60.54/bbl. The March gas oil contract fell $11 to $533.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes lost $1.36 to $57.20/bbl on Mar. 5.

Contact Sam Fletcher at [email protected].