MARKET WATCH: Energy prices fall again; oil, gas down 2% each

Energy prices fell June 17, giving back much of the small uptick in the previous session of the New York market, with the front-month crude contract down 2% over long-standing fears of diminished demand and slower recover of the world economy.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 20 -- Energy prices fell June 17, giving back much of the small uptick in the previous session of the New York market, with the front-month crude contract down 2% over long-standing fears of diminished demand and slower recover of the world economy.

The price of the front-month natural gas contract fell for the fifth consecutive session, also down 2% on June 17. “Despite a worse than expected drop in consumer sentiment, the Standard & Poor’s 500 index posted modest gains…as France and Germany outlined an agreement to aid debt-ridden Greece,” said analysts in the Houston office of Raymond James & Associates Inc. “Given the weakness in oil and gas, energy stocks underperformed.”

WTI and Brent registered net losses last week of $6.28/bbl and $5.57/bbl, respectively. “The drop in crude prices took place most during the second half of last week as US industrial production and Empire Manufacturing Survey both disappointed the market June 15,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Although the US weekly job report and housing starts for May were marginally better than market consensus, bearish sentiment prevails.”

Zhang said, “The latest Commodity Futures Trading Commission report shows that money managers had increased their net length in crude slightly by 1% week-to-week from its 15-week low last week (on futures and options combined basis). Commercial hedgers continued to reduce their net short positions, as consumers’ long hedges outstripped producers’ short hedges. Swap dealers increased their net short position by 5.6%, albeit from a much smaller base.”

He added, “It’s worth noting that the CFTC report was for position on June 15 before the price-drop later in the week. Net speculative length is likely to have been cut back substantially during the latter half of last week.”

European Union members are “still grappling” with Greece’s debt situation, which will continue to weigh on market sentiment. Zhang said, “The slowing pace of economic recovery in the US was the more important driving force behind the oil prices. We continue to see weakness in the oil market in the near term on softening economy, while market supply and demand fundamentals warrant a more bullish outlook for the medium term.”

There are 2 weeks left in Federal Reserve Bank's second quantitative easing (QE2) program, and cash assets held by US commercial banks remain at an “extraordinary high level,” some $854 billion more than at the start of this year. “This dwarfs the $600 billion QE program and is also $790 billion higher than a year ago or $1.6 trillion higher than in 2008,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

In other news, Goldman Sachs Group Inc. revised its estimate for the US gross domestic product growth from 3% to 2%. “This is not a small revision, and we can expect that the other banks will also be trimming their forecasts,” Jakob said. “The trend is definitely for downward revisions to the economic forecasts, and we have to account for a risk of a sub-50 US Institute for Supply Management (ISM) level.”

US Federal Reserve executives are scheduled to meet June 21-22. However, Jakob said, “If the macroeconomic data is not turning better, the Fed is now facing a problematic start of an increase in core inflation. The core consumer price index (the one watched by the Fed) had in May the largest month-to-month increase since May 2006. The Fed is not likely to announce any changes at this week’s meeting although it will be interesting to read the comments on the evolution of core inflation.”

Energy prices
The July contract for benchmark US light, sweet crudes dropped $1.94 to $93.01/bbl June 17 on the New York Mercantile Exchange. The August contract fell $1.96 to $93.40/bbl. On the US spot market, WTI at Cushing, Okla., remained in lockstep with the front-month futures contract, down $1.94 to $93.01/bbl.

Heating oil for July delivery declined 2.05¢ to $2.98/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.34¢ but closed essentially unchanged at a rounded $2.95/gal.

The July natural gas contract continued to fall, down 8.7¢ to $4.33 MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 13.7¢ to $4.40/MMbtu.

In London, the August IPE contract for North Sea Brent crude decreased by 81¢ to $113.21/bbl. Gas oil for July continued to tumble, losing $8.50 to $940.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $2.04 to $107.51/bbl. So far this year, OPEC basket price has averaged $106.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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