Oil prices plummeted in early May

Energy prices plunged May 5 with front-month crude falling 9% to less than $100/bbl in New York as the dollar escalated 1.9% over the euro after the European Central Bank indicated no hike in lending rates.

Sam Fletcher
OGJ Senior Writer

Energy prices plunged May 5 with front-month crude falling 9% to less than $100/bbl in New York as the dollar escalated 1.9% over the euro after the European Central Bank indicated no hike in lending rates. The June contract for benchmark US crudes fell $9.44 to $99.80/bbl after trading intraday at $98.25-109.38/bbl on the New York Mercantile Exchange. In London, the June IPE contract for North Sea Brent crude dropped $10.39 to $110.80/bbl. Prices continued down May 6 to $97.18/bbl on NYMEX, and $109.13/bbl for Brent.

Pressure on oil prices started before the euro “fell off a cliff” May 5, boosting the value of the dollar over the 2 days, said Olivier Jakob at Petromatrix, Zug, Switzerland. The euro entered “a zone where sustainability was at risk due to the strain it creates on the European export economy,” he said. “The overall commodity pressure started this week with the collapse of silver and that correction continued as sharp as ever.”

Jean-Claude Trichet, ECB president, “failed to mention the much-anticipated coded phrase, ‘strong vigilance,’ which tends to mean another rate increase in the following month,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products generally followed crude and moved sharply down. Term structures weakened only slightly, which suggests that the sell-off has been across the curve and has little to do with any significant changes in underlying supply and demand fundamentals. That said, we believe that the Brent term structure will weaken.”

The collapse in oil prices “is more a positioning event than a change underlying fundamentals,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC. “Indeed, US energy prices overall and gasoline prices specifically are not at the point of breaking the back of the economy in our view,” he said.

The June natural gas contract dropped 7%, or 31.6¢ to $4.26/MMbtu on NYMEX following a “somewhat bearish” injection report. The Energy Information Administration reported the injection of 72 bcf of gas into US underground storage in the week ended Apr. 29. Sour US economic data also weighed on the energy market, said analysts in the Houston office of Raymond James & Associates Inc.

However, they said, “After underperforming the commodities earlier in the week, energy stocks surprisingly held strong in the face of the meltdown, with the Oil Service Index and the SIG Oil Exploration & Production Index (EPX) falling only 2%, slightly underperforming the broader markets.” Oil and gas prices continued falling in early trading May 6.

Demand destruction
At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “The recent turnaround was provoked by the market’s suddenly waking up to the demand destruction that has been wrought by higher oil prices. Unless there is another disruption to oil supply, it seems that oil prices have hit the wall. At this time they may now depart from the broadly parallel movement in prices to 2008 and move to below the lofty levels of the last oil price bubble.”

They said, “There is growing evidence of oil demand destruction especially in the Organization for Economic Cooperation and Development and not least in the US. The EIA has recently revised down its assessment of US oil demand for February by a thumping 762,000 b/d, while earthquake-affected oil sales in Japan fell back by 5.3% in March. Total oil stocks are again rising in the US, and Saudi Arabia has been unable to place incremental crude volumes in the market. In a recent discussion with an executive of a US major, KBC was told “what keeps my CEO awake at night is fear of a demand shock this summer”. Indeed, it is beginning to look as though the loss of Libyan oil exports has now been offset not by alternative supplies but by a corresponding fall-back in the level of world oil demand under the pressure of (too) high prices.”

(Online May 9, 2011; author’s e-mail: samf@ogjonline.com)

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