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 samf@ogjonline.com.