MARKET WATCH: Oil prices fall in thin, volatile trading

The oil market was volatile but at low volume May 2 with crude trading in a $4/bbl range that included yet another 2½-year high before closing at a loss in the New York market, due to a still strengthening dollar and expectations US inventories are still increasing.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 3 -- The oil market was volatile but at low volume May 2 with crude trading in a $4/bbl range that included yet another 2½-year high before closing at a loss in the New York market, due to a still strengthening dollar and expectations US inventories are still increasing.

“The broader [equity] market was unable to hold onto early gains as well, closing relatively flat on the day,” said analysts in the Houston office of Raymond James & Associates Inc. “These factors coupled with a slew of earnings releases to add pressure on energy stocks.”

So far analysts see little influence on energy markets from the death of Osama bin Laden (OGJ Online, May 2, 2011). Olivier Jakob at Petromatrix, Zug, Switzerland, said it “does increase the odds for acceleration in the pull-out of Afghanistan, especially since that military operation is losing popularity and since the US political focus is going to be more and more on the 2012 presidential elections.”

He said, “An acceleration of the pull-out of Afghanistan should not be bearish [on] the dollar given that it should reduce some of the budget deficits, and combined with the end of the full quantitative easing [stimulus program], there is a case to see some support for the dollar in 2012. We are not there yet, and we still have to go through the interest rate differentials between the European Central Bank and the US Federal Reserve, but with the True Finns [a nationalist political party in Finland] still threatening to stop a bailout of Portugal and the restructuring of the Greek debt still looming ,we have the impression that we could be in for the last push down on the dollar index given that what comes with it (higher oil prices and headwind to European and Japanese exports) will have an economic impact on world growth.”

Jakob noted, “India, as China, is choking on inflation and raised rates by 50 basis points, more than expected (and the higher inflation comes despite the fact that India is still resisting increasing the price of domestic fuels).”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted the term structure of West Texas Intermediate and North Sea Brent was generally unchanged May 2. Net gains in April for front-month contracts included $7.21/bbl for WTI and $8.53/bbl for Brent. “The strong performance of the oil market has been driven by persistent unrest [in the Middle East and North Africa], abundant global liquidity, and broadly positive data flow out of the US,” Zhang said.

He pointed out first-quarter gross domestic product data last week “disappointed the market.” However, he said, “Other key indicators including personal spending, consumer confidence, and durable goods suggest that the momentum in the US economic recovery remains reasonably robust. Yesterday’s US Institute for Supply Management (ISM) manufacturing index for April beat market expectations and stayed firmly in expansionary mode. The non-farm payrolls for April due [May 6] will be under the spotlight as the market gauges the health of the US economy.

“As for geopolitical risks,” Zhang said, “the conflict in Libya is set to continue and may even escalate after the reported death of the youngest son of [Moammar] Gadhafi. The death of Bin Laden, capturing most of the news headlines, should have little impact on the oil market in the short term. Nevertheless, it might have increased the risk of random terror attacks in the short term.”

Looking ahead, Zhang said, “The market is likely to remain in a consolidation mode while waiting for US oil inventory data on [May 4] and US employment data on [May 6]. We see the bias remaining to the upside due to geopolitical risks and global monetary policies and economy.”

Meanwhile, other Standard Bank Group analysts reported, “The Chinese manufacturing Purchasing Managers Index (PMI) data has been disappointing so far this year, with a more sluggish than usual January-February period giving way to the weakest monthly rebound in March since at least 2006. The April figure shows the first monthly drop since 2006, declining by 0.9% to 52.9 from 53.4 in March.”

The Chinese manufacturing PMI “has developed a defined seasonal pattern since its 2005 launch, with strong March-April and August-September periods interspersed with a weaker summer (May-July) and holiday-related dips in October (National Day) and January-February (Chinese New Year),” they said. “The manufacturing PMI figures elsewhere in the world also paint a gloomy picture, with weaker US figures and a marginally better European Union number in April adding to the nervous outlook.”

Analysts for Barclays Capital Equity Research at the Offshore Technology Conference in Houston this week said meetings with executives and company representatives “increased our conviction in the unfolding international recovery.”

They reported, “A large number of contracts were recently awarded providing support to our view of heavy volume growth as the year progresses. The area of most relative volume growth will likely be Iraq, Brazil, Saudi Arabia, and the Norwegian sector of the North Sea.”

Capital expenditure decisions for 2012 are already under discussions as companies prepare to support recent and expected contract wins. “Large integrated project management (IPM) contracts remain up for grabs in Iraq, Mexico, and Ecuador,” said Barclays Capital analysts. They added, “Several companies indicated the benefits of the recovery in the deepwater Gulf of Mexico will be evident in the second quarter.”

The analysts said, “We continue to prefer the large cap, internationally leveraged companies as we believe the international recovery will outpace growth in North America over the next few quarters.”

Energy prices
The June contract for benchmark US sweet, light crudes traded at $110.82-114.83/bbl May 2 on the New York Mercantile Exchange prior to closing at $113.52/bbl, down 41¢ for the day. The July contract lost 39¢ to $114.04/bbl. On the US spot market, WTI at Cushing, Okla., remained in step with the front-month futures price, down 41¢ to $113.52/bbl.

The new front-month June contract for heating oil declined 2.37¢ to $3.52/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dropped 5.05¢ to $3.35/gal.

The June natural gas contract slipped by 0.5¢ to $4.69/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 11¢ to $4.61/MMbtu.

In London, the June IPE contract for North Sea Brent crude fell 77¢ to $125.12/bbl. Gas oil for May regained $6.25 to $1,039.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 45¢ to $119.90/bbl.

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