MARKET WATCH: Energy prices continue to fall

Commodities generally tumbled Aug. 17, with crude falling to its lowest price in 2 weeks, as traders lost faith in an imminent economic recovery and the US dollar strengthened.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 18 -- Commodities generally tumbled Aug. 17, with crude falling to its lowest price in 2 weeks, as traders lost faith in an imminent economic recovery and the US dollar strengthened.

“This week started off in the red, with all the major US indices trading meaningfully lower as expectations for a near-term economic rebound waned,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy indices were not immune to the sell-off, with the Oil Service Index down 3.9%, the S&P SuperComposite Oil and Gas Exploration & Production Index down 3.6%, and the Alerian MLP Index (AMZ)—a composite of the 50 most prominent energy master limited partnerships—down 2.2% for the day. Today, sentiment looks to have improved, as the broader markets were trading higher premarket. Crude oil continues to mirror the markets…trading higher before the open, while natural gas is flattish.”

In New Orleans, analysts at Pritchard Capital Partners LLC cited “continued concerns the global economic recovery will be more prolonged than forecasted, resulting in lower global oil demand.” They said, “The market needs to see incremental demand for crude outside of China, where oil imports have risen 53% this year through July, and weaker than expected Japanese economic growth, the world’s third-largest consumer of crude, pressured prices. Consensus estimates indicate that oil inventories gained 1.35 million bbl last week and refinery utilization was up 0.2% from the previous week, bringing inventories above 353 million bbl, or 11% above its 5-year average. storage of 317 million bbl. Nonencouraging economic data, a stronger dollar, and a build in inventories after tomorrow’s Department of Energy report may send crude lower, testing support at $63/bbl.”

Pritchard Capital Partners reported, “Gas prices fell to their lowest levels since 2002 and are now down 44% this year.” They predicted, “Mild 15-day forecasts in the Northeast and Midwest, poor supply and demand fundamentals, and the Commodity Futures Trading Commission pressuring Congress to limit speculation in energy futures and trading will likely bring natural gas prices to test further lows beyond the $3.15/MMbtu level hit in yesterday’s trading.”

They added, “Cash prices at Henry Hub are likely to revisit late April lows of $3.24/MMbtu as storage seems likely to test the definition of ‘full.’ We are somewhat concerned that full storage in Canada could drive an increase in exports to the US over the next 2 months. LNG imports remain sharply below early summer estimates at roughly 0.9-1.1 bcfd.”

Pritchard Capital analysts said, “The 2010 forward curve continues to move lower and now stands at $5.84/MMbtu, down from the $6.29/MMbtu level seen in May. The 12-month forward curve is $5.09/MMbtu, up from the low of $4.45/MMbtu on Apr. 27. Producers, in our view, are likely to hedge when the 2010 curve trades above $6.25/Mcf. Little fundamental news to support markets other than continued news of shut-ins expected over the next 2-3 months since the impact of sequential production declines (we believe declines likely started in May at least in the Barnett shale and several Rockies basins) will not be felt until August or September timeframes. We remain confident that 2010 consensus forecast of $6.25/MMbtu is conservative (our estimate is $6.50/MMbtu). Rockies cash prices remain depressed.”

They said, “The risk of a short-lived late August and September US LNG import spike looks more uncertain given forward price curves.”

Energy prices
The September contract for benchmark US sweet, light crudes dropped 76¢ to $66.75/bbl Aug. 17 on the New York Mercantile Exchange. The October contract lost 79¢ to $68.81/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., remained in step with the front-month futures contract, down 76¢ to $66.75/bbl. Heating oil for September delivery declined 1.4¢ to $1.83/gal on NYMEX. However, reformulated blend stock for oxygenate blending (RBOB) for the same month gained 1.35¢ to $1.95/gal.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, “The greatest level of support came yesterday from the RBOB contract, and it managed to hold on to the $1.95/bbl level that has been a pivotal number for the last 2 months. Given that we have been recently trading a range rather than a trend, it is difficult to fully read into candlestick formations but we must note that RBOB printed well defined hammer (bullish reversal).”

The September natural gas contract on NYMEX dropped 7.5¢ to $3.16/MMbtu. On the US spot market, gas at Henry Hub, La., fell 8¢ to $3.12/MMbtu.

In London, the October IPE contract for North Sea Brent crude decreased 90¢ to $70.54/bbl. Gas oil for September lost $20.75 to $569.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $3.10 to $68.04/bbl on Aug. 17.

Contact Sam Fletcher at samf@ogjonline.com.

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