MARKET WATCH: Economic indicators push down oil prices

Oil prices dropped June 4, ending a 2-day rally for crude in the New York market as the European financial crisis appeared to spread and the US Department of Labor reported fewer-than-expected job additions during May.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 7 -- Oil prices dropped June 4, ending a 2-day rally for crude in the New York market as the European financial crisis appeared to spread and the US Department of Labor reported fewer-than-expected job additions during May.

The June 4 “flight to safety” among equity investors helped lift the dollar to a 4-year high against the euro, said analysts in the Houston office of Raymond James & Associates Inc. “On the commodity front, natural gas continued to rally, posting a 2.4% gain. Separately, crude remains below the $72/bbl mark after posting a sharp 4.9% decline at the end of last week,” they said. “Look for the markets to regain some lost ground today as stock futures are trading slightly higher prior to the opening bell.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, reported, “Since all bets were on the economic recovery bailing us out of the European debt crisis, oil plunged 4.2% when the Labor Department reported that payrolls rose by only 431,000 in May, while the consensus called for a 536,000 gain. Private payrolls rose less than forecast and 411,000 of the 431,000 gain came from the temporary government hiring of the census workers. Prices were already feeling the pressure of the euro’s decline against the dollar as reports emerged that Hungry could be the next country to be afflicted by the European debt crisis, but fresh concerns about the strength of the US economic recovery is what broke the market’s back on [June 4]. We believe that although the recovery is rather jobless so far, the ingredients are there for it to pick up steam in the second half of the year.”

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, “Two weeks ago the Standard & Poor’s 500 [index] made a rebound during the week and just as it was starting to test the resistance of the 200-day moving average on the last day of the week, it was hit by worries on the downgrading of Spain. Last week, the S&P managed again to rebound but just as it was starting to test the resistance of the 200-day moving average, it was hit by worries about Hungary. Strangely enough, each time the S&P 500 has a chance to move above the 200-day moving average, it is hit by another European worry. The S&P was finally down 2.25% during [last] week and is down 4.5% on the year-to-date while the NASDAQ is down 1.68% on the week and down 2.20% on the year-to-date.”

Jakob said, “It was widely expected that the census jobs would make a large contribution to the non-farm payroll, but it was not expected that it will be almost all of the additions. In short, apart from the temporary additions from the census employment, there were only 20,000 jobs added to the nonfarm payrolls. This is problematic because the addition to the workforce for the census will soon be reversed and will therefore make it very likely that in coming months we start to see some negative numbers once again in the non-farm payrolls.”

He said, “Adjusting for the census employment, there has been only 455,000 jobs added in non-farm payrolls this year. This makes an average per month of 91,000 jobs and compares [with] 6.8 million lost jobs since July 2008. In other words, at the current census-adjusted 2010 average, it will take 75 months or more than 6 years to reverse the job losses suffered since July 2008.”

Furthermore, Jakob said, “The number of long-term unemployment (longer than 27 weeks) continues to slowly increase. The US unemployment rate fell slightly from 9.9% to 9.7%, which is a slow improvement. However, European unemployment numbers for April (released June 1) show that unemployment in Europe continues to increase and has moved from 10% in March to 10.1% in April. Therefore, until April, unemployment in the Atlantic Basin was still on a rising slope, with 3.8 million more unemployed than in April 2009 or 14.6 million more unemployed than in April 2008. Overall, for now we are still in a jobless recovery.”

On the other hand, the front-month gas futures contract posted “the biggest weekly gain of 11% since the week that ended Dec. 18 on increasing summer cooling demand and on shifting of asset allocations from oil to natural gas,” Sharma said. “Reduced drilling activity due to the Gulf of Mexico moratorium is also providing support to prices,” he said.

According to the Baker Hughes Inc. rig count, the number of natural gas rigs in the gulf declined by 5 to 19 and total gas rigs dropped by 20 week-over-week to 947. Onshore gas rigs declined by 15 of which 4 were horizontal, Sharma said (OGJ Online, June 4, 2010). “Although the temperatures moderated towards the end of last week and going into the weekend, we expect cooling demand to pick up this week as weather is expected to get hotter than normal again,” Sharma said.

Energy prices
The July contract for benchmark US light, sweet crudes dropped $3.10 to $71.51/bbl June 4 on the New York Mercantile Exchange. The August contract fell $3.25 to $72.80/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.10 to $71.51/bbl. Heating oil for July delivery declined 8.14¢ to $1.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 8.59¢ to $2/gal.

The July natural gas contract advanced 10.7¢ to $4.80/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 11.5¢, also to $4.80/MMbtu.

In London, the July IPE contract for North Sea Brent crude decreased $3.32 to $72.09/bbl. Gas oil for June lost $12 to $626.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 77¢ to $72.09/bbl. So far this year, OPEC’s basket price has averaged $76.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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