MARKET WATCH: Energy prices retreat before world economy woes

Energy prices declined across the board June 7 with the front-month crude contract dropping fractionally to just under $85/bbl in the New York futures market while natural gas fell 6% following a bearish government report on US inventory.

Energy prices declined across the board June 7 with the front-month crude contract dropping fractionally to just under $85/bbl in the New York futures market while natural gas fell 6% following a bearish government report on US inventory.

“The broader markets rallied after China's central bank lowered its benchmark lending rate but failed to sustain momentum as they considered the low likelihood of any useful legislation passing through Congress with lawmakers engaged in daily fistfights (metaphorically, at least for now),” said analysts in the Houston office of Raymond James & Associates Inc.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil staged a strong rally during intraday trading but settled at a small loss. The swing was triggered firstly by the surprising news that China had cut [its] benchmark interest rate, and secondly by somewhat disappointing testimony by the Federal Reserve chairman to the US Congress.”

Fed Chairman Ben Bernanke urged Congress on June 7 to support the economy through federal spending and not rely on the Fed for a “magic bullet” cure for the faltering US economy.

In Zug, Switzerland, Olivier Jakob at Petromatrix said, “The rebounding action in Brent was put to a halt by Bernanke, and with the overnight weakness, the weekly charts on Brent are not looking good.” He said, “To maintain a floor, Brent needs to close the week above $98.50/bbl. It managed that last week (closing at $98.43/bbl, close enough), but with the overnight weakness that level is at risk for today. If $98.50/bbl cannot be regained, then the risk is that Brent starts to move in a $90-100/bbl trading range.”

Zhang reported, “The oil product market also fell across the board amid signs of increasing refining run rates and growing product inventories. In the options market, implied volatility fell slightly yesterday but rose again this morning as the market suffered a sell-off.”

He said, “China’s rate cut yesterday surprised the market, which expected a more gradual easing in monetary policy such as reducing the bank’s reserve ratio. With China’s industrial production figure due to be released [on June 9], the market seems spooked that the slowdown in China is more severe than originally anticipated.”

Prices in both the commodity and equity markets declined in early trading June 8 after Fitch Ratings Ltd. overnight downgraded Spain’s credit rating by three notches to BBB, two notches short of “junk” status. The rating service also placed Spain on negative outlook because it risks contagion from the financial crisis in Greece.

‘Fearful’ market

“The market appears to be running in fear again today after the hope of imminent central bank support has been dashed by the European Central Bank and the Fed,” Zhang said. However, he reiterated, “Further selling pressure is likely to be limited as money managers have already cut speculative length to the lowest level since September 2010. This makes the oil market more prone to a rally should the global economy and the Euro-zone stabilize. We see the current price level as a good consumer hedging opportunity.”

Jakob reported, “The Canadian crude oil discount to West Texas Intermediate remains wide; hence on a flat price basis Canadian heavy crude oil is now below $60/bbl. At these levels, it is difficult for us now to categorize the North American crude oils as ‘over-valued.’ There is still a liquidation risk on speculative positions, but on a fundamental basis we were happier to have a bearish hat at $90/bbl for Canadian heavy than below $60/bbl.”

He noted Irving Oil Ltd.’s 300,000 b/d refinery in New Brunswick, Canada, recently tested a unit train of Bakken crude. “It is upgrading its rail off-loading capacity and will likely increase intakes of Bakken crude in the second half of the year,” said Jakob. “Slowly but surely, the US crude oil production surge is starting to make its way not only to the US Gulf Coast but also to the US East Coast. The flows to the East Coast are for now still relatively marginal, but things are moving so fast in the US that we will probably be surprised at how suddenly the US East Coast is taking more inland crude oil.” Meanwhile, Europe continues to send more crude to South Korea.

Oil ministers of the Organization of Petroleum Exporting Countries are to meet June 14 in Vienna. “As the OPEC crude basket price has fallen below $100/bbl, Saudi Arabia is likely to come under more pressure from other members to reduce its production levels. Iran is likely to be particularly vocal as its oil revenue is badly squeezed by both falling prices and falling exports,” said Zhang.

The Energy Information Administration reported the injection of 62 bcf of natural gas into US underground storage in the week ended June 1, up from Wall Street’s consensus for an input of 58 bcf. That raised working gas in storage to 2.877 tcf, which is 713 bcf more than last year at this time and 687 bcf above the 5-year average (OGJ Online, June 7, 2012).

Energy prices

The July and August contracts for benchmark US light, sweet crudes on June 7 dropped 20¢ each to $84.82/bbl and $85.13/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was down 20¢ to $84.82/bbl.

Heating oil for July delivery dipped 0.46¢ to $2.67/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 0.53¢ to $2.68/gal.

The July natural gas contract fell 14.7¢ to $2.27/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 7.6¢ to $2.32/MMbtu.

In London, the July IPE contract for North Sea Brent retreated 71¢ to $99.93/bbl. Gas oil for June dropped $6.75 to $858.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes decreased 19¢ to $97.70/bbl.

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