MARKET WATCH: Crude ends rally as oil, gas prices fall

The price of the front-month crude contract dropped 1.1% Feb. 27, ending an eight-session rally in the New York market, after the Group of 20 finance ministers from the world’s largest economies rejected requests for financial assistance in the European crisis at their meeting in Mexico City.

Natural gas tumbled 4.1% in that market on forecasts of continued “abnormally” mild weather, said analysts in the Houston office of Raymond James & Associates Inc.

Following the close of floor trading in the New York market, Standard & Poor’s downgraded Greece’s already junk-level credit rating, declaring the country to be in “selective default” on its sovereign debt.

Weaker economic indicators also undermined crude prices. The US Department of Commerce reported a 4% drop in January sales of manufactured goods, exceeding the 1% loss economists expected. Home prices also were down.

However, the Conference Board reported Feb. 28 that US consumer confidence jumped this month to its highest level in a year on public perception of an improving job market. That raised the Consumer Confidence Index to 70.8 from a revised 61.5 in January. Analysts expected an increase only to 63.

“Oil products were also under pressure as demand is being crippled by high oil prices,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The time spread in both Brent and ICE gas oil continues to weaken, with the backwardation in the front-end of ICE gas oil curves flattening substantially.” A similar move is developing in the structure of reformulated stock for oxygenate blending (RBOB) gasoline and heating oil in the New York market, “which reinforces a bearish physical demand picture,” he said.

Some say high oil prices have surpassed the Euro-zone debt crisis as the biggest threat to global economy. This has produced calls for member nations of the Organization for Economic Cooperation and Development to release strategic reserves to drive down prices. “While this is unlikely to take place immediately, we do see a decent probability of a release taking place if prices stay at the current level or even climb further over the coming weeks,” Zhang said. “Meanwhile, Saudi Arabia is likely to push more oil to the market in an attempt to prevent a stock release by the OECD.”

He said, “While both scenarios remain rather uncertain, we still foresee weakness in the oil market induced by a soft physical market.” Zhang sees “various signs that the physical market has been squeezed by heated oil prices. As we approach month-end, there a good chance that net long position holders are tempted to lock in their gains, as on aggregate the net speculative length has been at very high level.”

Energy prices

The April contract for benchmark US sweet, light crudes dropped $1.21 to $108.56/bbl Feb. 27 on the New York Mercantile Exchange. The May contract lost $1.16 to $109.02/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.21 to $108.56/bbl, still in pace with the front-month futures contract.

Heating oil for March delivery declined 2.95¢ to $3.29/gal on NYMEX. RBOB for the same month decreased 2.45¢ to $3.13/gal.

The March natural gas contract fell 10.4¢ to $2.45/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 4.4¢ to $2.56/MMbtu.

In London, the April IPE contract for North Sea Brent was down $1.30 to $124.17/bbl. Gas oil for March increased $1.50 to $1,032.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 39¢ to $123.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.