MARKET WATCH: Demand concerns end oil market rally
Oil prices dropped among indications of a weakening economy with front-month crude falling 1.1% Apr. 11, ending a 3-day rally in the New York futures market. However, front-month natural gas futures rose 0.6% after the US Energy Information Administration reported a slightly higher-than-expected withdrawal (OGJ Online, Apr. 11, 2013).
“Broader markets and energy indices advanced in lockstep yesterday with the Standard & Poor’s 500 Index, SIG Oil Exploration & Production Index and the Oil Service Index all climbing 0.4%,” said analysts in the Houston office of Raymond James & Associates Inc.
Concerns over energy demand, particularly in Europe, weighed more heavily on North Sea Brent than on West Texas Intermediate. Marc Ground at Standard New York Securities Inc., the Standard Bank Group, reported, “The Brent-WTI spread closed at $10.76/bbl—its lowest level since last July. While the narrowing of the spread is more in line with the two benchmarks’ respective fundamentals, we feel that the market is perhaps overestimating the extent to which the glut of US crude oil inventories will be worked down over the driving season. To us, the current narrowing is perhaps overdone or at the very least is reaching its limit.”
Meanwhile, the Paris-based International Energy Agency reduced its projections for global oil demand for the third successive month, predicting European demand will be the weakest in almost 30 years. “We have long held the view that not much can be expected from the Euro-zone in terms of oil demand, with economic weakness there expected to continue well into 2013,” Ground said.
“While data flow on the US economy over the past quarter, barring last week, has been encouraging,” he said, “we remain concerned about the effect that the sequester (and the other upcoming fiscal hurdles) will have on US economic growth and ultimately oil demand. However, given the resilience of the US economy so far in the face of past fiscal issues, we acknowledge that this poses an upside risk to our forecast.”
Ground noted, “The market has recently tempered its optimism over China, coming more in line with our view held since the beginning of the year. There is little doubt that China’s economy has successfully landed softly, but we are concerned about the relatively weak growth momentum shown year-to-date. Our base case is still that the potential for significant upside in Chinese economic activity seems compressed. We forecast a second quarter average of $110/bbl for Brent (although this is certainly tilted to the downside) and $93/bbl for WTI.”
Energy prices
The May contract for benchmark US light, sweet crudes fell $1.13 to $93.51/bbl Apr. 11 on the New York Mercantile Exchange. The June contract dropped $1.12 to $93.85/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.13 to $93.51/bbl.
Heating oil for May delivery declined 4.88¢ to $2.90/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.41¢ to $2.83/gal.
However, the May natural gas contract gained 5.4¢ to $4.14/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.5¢ to $4.12/MMbtu.
In London, the May IPE contract for North Sea Brent lost $1.52 to $104.27/bbl. Gas oil for April was unchanged at $885/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 82¢ to $102.44/bbl.
Contact Sam Fletcher at [email protected].
About the Author
Sam Fletcher
Senior Writer
I'm third-generation blue-collar oil field worker, born in the great East Texas Field and completed high school in the Permian Basin of West Texas where I spent a couple of summers hustling jugs and loading shot holes on seismic crews. My family was oil field trash back when it was an insult instead of a brag on a bumper sticker. I enlisted in the US Army in 1961-1964 looking for a way out of a life of stoop-labor in the oil patch. I didn't succeed then, but a few years later when they passed a new GI Bill for Vietnam veterans, they backdated it to cover my period of enlistment and finally gave me the means to attend college. I'd wanted a career in journalism since my junior year in high school when I was editor of the school newspaper. I financed my college education with the GI bill, parttime work, and a few scholarships and earned a bachelor's degree and later a master's degree in mass communication at Texas Tech University. I worked some years on Texas daily newspapers and even taught journalism a couple of semesters at a junior college in San Antonio before joining the metropolitan Houston Post in 1973. In 1977 I became the energy reporter for the paper, primarily because I was the only writer who'd ever broke a sweat in sight of an oil rig. I covered the oil patch through its biggest boom in the 1970s, its worst depression in the 1980s, and its subsequent rise from the ashes as the industry reinvented itself yet again. When the Post folded in 1995, I made the switch to oil industry publications. At the start of the new century, I joined the Oil & Gas Journal, long the "Bible" of the oil industry. I've been writing about the oil and gas industry's successes and setbacks for a long time, and I've loved every minute of it.