MARKET WATCH: Crude hits 3-week low

The front-month crude price fell nearly 4% June 22 to the lowest level in nearly 3 weeks on the New York futures market as the World Bank speculated the global economy will contract more than expected this year, renewing market worries of dwindling oil demand.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 23 -- The front-month crude price fell nearly 4% June 22 to the lowest level in nearly 3 weeks on the New York futures market as the World Bank speculated the global economy will contract more than expected this year, renewing market worries of dwindling oil demand.

However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “We have read many comments that the World Bank revising the world gross domestic product growth to minus 2.9% for 2009 was the leading indicator [in the June 22 price fall], but in our opinion this was more the case of finding a fundamental justification after the fact than a market trigger. In regard to the World Bank GDP numbers, the most interesting analysis we read was from the Canadian Toronto-Dominion Bank that points out that the World Bank has a different methodology than the [United Nations] International Monetary Fund as they weigh countries on market exchange rates rather than rather than [purchasing power parity-adjusted rates, the long-term equilibrium exchange rate of two currencies to equalize their purchasing power].” Comparing World Bank apples to IMF apples results in a World GDP decline of 1.7% for 2009 and a growth of 2.8% in 2010, Jakob said.

“Still, we are coming to the end of the second quarter so we should prepare ourselves for some higher global volatility,” Jakob said. “We view the global markets dynamics of the last few days one where liquidation on gasoline has led to a correction in crude oil which in turn has pressured the equity markets given that the recent equity support was for a big part a commodity drive.”

In New Orleans, analysts at Pritchard Capital Partners LLC said the crude futures price fell June 22 in response to a stronger US dollar that strengthened for several reasons, namely:

-- Growing belief in the market that, although the outlook for the US economy is less than certain, it is in a better position than other economies in the developed world.

-- Reports Argentineans were buying US dollars in lieu of the Argentine peso ahead of elections, showing the US dollar maintains its safe haven currency status.

-- The World Bank cut its global growth forecast from –1.7% to –2.9%. The dollar strength contributed to commodity weakness, but speculators anticipated the crude sell-off as the New York Mercantile Exchange reported speculators cut their net crude long positions in half last week, analysts said.

In Houston, analysts at Raymond James & Associates Inc. noted energy stocks tumbled June 22. “We think the recent pullback could continue given our uncertainty regarding near-term crude prices and expected weakness in natural gas. That being said, premarket strength in the broader market futures, oil, and natural gas could push energy stocks higher today,” said Raymond James analysts.

Pritchard Capital Partners said, “Natural gas held up better than most commodities as it has not participated in the weak dollar-strong commodity trade. However, concerns over the economy and that the immediate weather in the Northeast will remain mild in the primary consuming regions (lower air conditioning demand) contributed to the weakness in natural gas.”

EU-OPEC dialogue
Ministers from the European Union and the Organization of the Petroleum Exporting Countries met June 23 in Vienna to discuss economic prospects and oil market developments. In a joint press release, they acknowledged the European economy is in the deepest, most widespread recession of the postwar era, with the EU GDP projected to fall 4% this year before broadly stabilizing in 2010. “With the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010. Labor markets will be severely affected, with the unemployment rate expected to increase to 11% in the EU in 2010. The public deficit is also projected to rise sharply, to 7.25% of GDP in 2010,” they said.

OPEC said unprecedented price volatility in 2008, with swings of more than $100/bbl in less than 6 months coupled with the profound financial crisis and deep economic downturn, led to a sharp drop in global oil demand, a large stock overhang, and a rapid slide in prices. While its proactive measures had helped steady the market, OPEC stressed that oil prices at low levels would not sustain the industry and could lead to underinvestment, thus sowing the seeds for future market tightness and instability.

At the meeting, members endorsed recommendation from the April joint workshop for an urgent and global response to financial market challenges. They noted warnings from the workshop that the speculation issue had not been resolved yet and the 2008 bubble could be repeated, if adequate regulatory reforms, including greater transparency, were not made as part of an overall reshaping of the global financial sector.

In the day’s second session, ministers addressed long-term energy outlook and policies, with the EU presenting a follow up of European energy policies proposed in the first Strategic Energy Review, adopted in March 2007, which focused on sustainable developments and competitiveness issues.

“It was underlined that the most likely EU scenarios up to 2020 lead to increased imports of fossil fuels and in particular oil. This confirms the importance of fostering the dialogue between consumers and producers in a world of growing interdependence, in order to create the appropriate conditions of investment all along the supply chain,” the statement said.

OPEC said the economic recession, together with new legislation and regulations in many consuming countries added to longstanding uncertainties about future demand and led to downward revisions to the long-term oil and energy outlook to 2030, reemphasizing the issue of security of demand. “This could have implications for future upstream and downstream investment requirements. Nevertheless, fossil fuels would continue to meet most of the world’s energy needs, with oil playing the leading role,” the joint statement said.

Energy prices
The July contract for benchmark US sweet, light crudes dropped $2.64 to $66.93/bbl June 22 on NYMEX. The August contract fell $2.52 to $67.50/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.62 to $66.93/bbl. Heating oil for July dropped 5.92¢ to $1.73/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month lost 6.47¢ to $1.86/gal.

The July natural gas contract fell 9.9¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 6¢ to $3.96/MMbtu.

In London, the August IPE contract for North Sea Brent crude dropped $2.21 to $66.98/bbl. Gas oil for July fell $35.25 to $548/tonne.

The average price for OPEC's basket of 12 reference crudes lost $2.86 to $67.41/bbl on June 22.

Contact Sam Fletcher at samf@ogjonline.com.

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