MARKET WATCH: Crude falls 3% as energy prices continue to waffle

Oil prices continued their daily seesaw pattern May 23 with crude dropping 3% on the New York market and energy corporate stocks also underperforming amid rising concerns regarding the European debt crisis.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 24 -- Oil prices continued their daily seesaw pattern May 23 with crude dropping 3% on the New York market and energy corporate stocks also underperforming amid rising concerns regarding the European debt crisis.

Expectations for lower demand growth from China added pressure to the price of crude, but natural gas posted gains of more than 2% “on rising demand from extended nuclear outages,” said analysts in the Houston office of Raymond James & Associates Inc. Oil, gas, and broader market prices were up in early trading May 24, they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil remained range-bound yesterday, as has been the case for the last 2 weeks.” In contrast, reformulated blend stock (RBOB) “registered a small gain” in the New York market, “which reversed the recent slide of RBOB crack, in anticipation of a moderate inventory build for gasoline in the US,” he said. The New York heating oil crack weakened further, while term structures for West Texas Intermediate and Brent continued to soften.

“The flat price of crude oil was brought to the lower band of the recent trading range on the pressure of the weaker euro,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The Standard & Poor’s 500 index was also weaker and tested the support of the 100-day moving average. The house of asset cards is in danger, and lower oil prices are a significant risk for the S&P valuations.” It is time, he said, “to call the fire brigade.”

Zhang said, “Despite the spreading of bearish sentiment in many markets, oil has held reasonable stable in a trading range established since the large drop just over 2 weeks ago. In the short term, the market is likely to be in a consolidation mode, with further downside risks if the Eurozone debt crisis and US macroeconomic data show further deterioration. For the medium term, the oil market fundamentals will continue tightening, with declining inventories and diminishing spare capacity, which points to further upside for oil prices.”

Forecasts of $130/bbl
Meanwhile, both the Goldman Sachs Group Inc. and Morgan Stanley Capital Group overnight increased their price forecasts on a 12-month basis to $130/bbl for North Sea Brent crude. That was after analysts at J.P. Morgan, one of the leading global investment banks, reiterated May 23 its earlier prediction that crude will be selling at $130/bbl by yearend.

Jakob noted just a few weeks ago on Apr. 12, Goldman Sachs analysts claimed that “even with the loss of Libyan production,” there were enough inventories of crude in the West and spare production capacity among the Organization of Petroleum Exporting Countries “to avoid the degree of physical tightness experienced in 2008 well into next year.”

Now Goldman Sachs analysts expect “the ongoing loss of Libyan production and disappointing non-OPEC production will continue to tighten the oil market to ‘critically tight levels’ in early 2012…. Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012.”

Jakob reported, “In short, at $130/bbl Brent, the world swims in OPEC spare capacity, but at $100/bbl the spare capacity evaporates. What we know from 2008 and early 2011 is that at $130/bbl there is demand destruction; hence even if the swap dealers are able to find enough flows to push oil prices to those levels (required to have oil provide the returns expected of an asset class), the sustainability of those price levels is difficult due to demand destruction.”

In other news, Jakob said gasoline demand in April was down 6% in Italy from a year ago and down 3.3% in France. “Diesel demand was slightly lower than last year in France (by 1%) and slightly higher in Italy (by 0.5%),” he said. Gasoline was “relatively well supported” May 23 due to a fluid catalytic cracking unit malfunction at Irving Oil Ltd.’s 300,000 b/d Saint John, NB, refinery—Canada's largest.

An ash cloud from the Grimscotn volcano in Iceland has spread over part of the UK, disrupting air traffic in Scotland. “As the cloud is shifting towards Norway, further disruptions are expected there. It is impossible to predict the potential severity and duration of the disruption. Nevertheless, the risk of further air travel disruptions is likely to keep the jet differential under pressure,” Zhang reported.

In April 2010, eruptions from the Icelandic Eyjafjallajokull volcano created ash clouds that forced the closure of large parts of European airspace in about 20 countries, the worst air travel disruption since World War II.

“There will also be an impact on other parts of the oil barrel besides jet [fuel], as some of the lost air travel would be made up by car and train journeys,” said Zhang. “This would be supportive of gasoline and diesel to some extent. Therefore, the market might experience a shift in value among different light products.”

Energy prices
The new front-month July contract for benchmark US sweet, light crudes fell $2.40 to $97.70 bbl May 23 on the New York Mercantile Exchange. The August contract dropped $2.34 to $98.14/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.79 to $97.70/bbl.

Heating oil for June delivery declined 7.12¢ to $2.85/gal on NYMEX. RBOB for the same month inched up 0.23¢ but closed essentially unchanged at a rounded $2.94/gal.

The June contract for natural gas climbed 11.6¢ to $4.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 24.2¢ to $4.32/MMbtu.

In London, the July IPE contract for North Sea Brent lost $2.29 to $110.10/bbl. Gas oil for June was down $9.75 to $899.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dropped $1.96 to $105.46/bbl.

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