MARKET WATCH: Crude drops below $65/bbl to 5-week low

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 7 -- Energy prices continued to tumble July 6 with front-month crude dropping 4.1% to a 5-week low as the New York market resumed trading after the extended weekend for the US Independence Day holiday.

The week got off to an “ugly start,” said analysts in the Houston office of Raymond James & Associates Inc., as energy corporate stock prices followed crude and natural gas lower. In New Orleans, analysts at Pritchard Capital Partners LLC said, “Crude continued its slide on fears the economic recovery will not live up to expectations, US dollar strength, and the build in gasoline inventories during what has always been peak driving season.”

The steep price fall in crude prices on the US market “is making for a sharp change in the delta option hedges [an options strategy to reduce price movement risks by offsetting long and short positions], and this would accelerate if West Texas Intermediate was to get closer to $60/bbl, as it is at that level that large layers of puts are positioned both on the August and September options,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Meanwhile, crude prices were slightly higher in early trading July 7 as the US dollar declined relative to the euro.

Natural gas dropped more than 3% July 6 on the New York market. “We continue to believe that natural gas oversupply will cause gas prices to fall below $3/Mcf this summer,” Raymond James analysts said.

Pritchard Capital Partners said, “Natural gas retreated for the same reasons other commodities did. The mild summer to date in the Northeast and Midwest should continue to lead to low air-conditioning demand and natural gas demand from power generators.” Cooling degree days reported July 4 were down from the previous week and 23% below its 5-year average for the period.

In other news, the US Commodity Futures Trading Commission said it will improve its reporting of contracts held by swaps dealers participating in “bona fide hedging” and hedge funds. Legislation has been introduced in Congress to force the CFTC to use emergency authority to stop oil speculation.

Energy prices
The August contract for benchmark US sweet, light crudes fell $2.68 to $64.05/bbl July 6 on the New York Mercantile Exchange. The September contract dropped $2.77 to $64.97/bbl. Heating oil for August was down 7.5¢ to $1.63/gal. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 5.04¢ to $1.74/gal.

The August natural gas contract retreated 12.8¢ to $3.49/MMbtu on NYMEX, “a [general] level natural gas has bounced from in recent price declines,” said Pritchard Capital Partners. On the US spot market, gas at Henry Hub, La., dropped 23¢ to $3.28/MMbtu. Pritchard Capital said, “The spread across the [gas futures] curve has widened during the last leg down, as NYMEX August 2009 natural gas closed at $3.49/MMbtu and the July 2010 contract closed at $5.78/MMbtu. There is a 66% spread between the two contracts and most of the recent downturn has been in the front month. In the past when the spread has widened to this extent, it has been a good entry point for natural gas from a trading standpoint.”

In London, the August IPE contract for North Sea Brent crude lost $1.56 to $64.05/bbl. The July gas oil contract fell $12 to $517.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $2.46 to $63.66/bbl on July 6.

Contact Sam Fletcher at samf@ogjonline.com.