MARKET WATCH: Crude takes largest 1-day loss since February

The price of the front-month crude contract continued to fall Apr. 16 in the New York market, dropping 2.65% to close slightly above $83/bbl in the largest 1-day percentage decline since early February as it followed the equity market down after the US Securities and Exchange Commission charged The Goldman Sachs Group Inc. with fraud over subprime-related trades of financial securities.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 19 -- The price of the front-month crude contract continued to fall Apr. 16 in the New York market, dropping 2.65% to close slightly above $83/bbl in the largest 1-day percentage decline since early February as it followed the equity market down after the US Securities and Exchange Commission charged The Goldman Sachs Group Inc. with fraud over subprime-related trades of financial securities.

Officials of the financial group said the accusations are “unfounded in law and fact” and that the risk associated with the securities was known to the two affected corporate investors “who were among the most sophisticated mortgage investors in the world.”

The US dollar strengthened 0.5% in the wake of the federal charges and continued concern over Greece's financial problems.

Despite the latest price drop, analysts in the Houston office of Raymond James & Associates Inc. said, “Crude oil continues to hover around $85/bbl (first reached back in October). After the 5% jump in March, crude topped out near $87/bbl and has since settled in at $85/bbl. In the short run, we remain cautious due to the bloated domestic inventory levels. However, incremental supply projects continue to be delayed, which should constrict long-term supply (bullish long-term picture).”

They said, “For oil prices to punch out above $85/bbl, we believe the overall supply-demand dynamics will have to tighten, and recent signs have been encouraging, as oil demand is beginning to rebound in a number of countries. When combined with a number of incremental supply projects that have been postponed or shelved, the long-term outlook looks quite promising. As a result, we remain confident in our 2011 oil price forecast of $95/bbl and expect the commodity to reach triple digits by the end of 2011. Should potential geopolitical concerns take a turn for the worse (read Iran), either or both of these estimates could prove meaningfully conservative.”

Natural gas rebounds
The front-month price for natural gas rebounded 1.4% Apr. 16 in New York and continued climbing in early trading Apr. 19 as housing starts in March increased more than expected. In New Orleans, analysts at Pritchard Capital Partners LLC said, “A Commerce Department report showed that new housing permits grew at the fastest pace in more than a year while the US housing starts increased 1.6% month-over-month to an annual rate of 626,000 from 616,000 in February.” Natural Gas prices ended the week 5.4¢/MMbtu higher despite falling 21.4¢/MMbtu Apr. 15 on a larger than expected US storage report.

“Despite strong supplies and lack of weather demand, prices have remained around $4[/MMbtu] due to buying support coming from industrial and electric consumers,” said Pritchard Capital Partners.

“After the second coldest February of the past 10 years, March was unseasonably mild,” said Raymond James analysts. “As a result, injection season started early, and natural gas prices plummeted. The market has been trending looser (i.e., more gas being added to storage) [without] weather-related demand. Thus far in April, prices have stayed around $4/Mcf. The market appears to be looking ahead at an oversupplied summer.”

In early April, Raymond James revised its natural gas forecast for 2010 to $4.25/Mcf. “Despite the fact that we entered injection season at lower inventory levels year-over-year, we are still worried about natural gas over the course of the year. We believe natural gas is range-bound between $4-6/Mcf for the next few years but has a ceiling near $5/Mcf in the near term. The downside potential is similar to last year [below $3/Mcf], considering that we expect to fill storage once again,” analysts said.

They noted, “Natural gas demand was up in 2009, solely as a result of fairly major coal-to-gas switching (nearly 2 bcfd).” Above $5/Mcf, coal prices become competitive with gas, “and at $6/Mcf, the entire 2 bcfd returns to coal.” Raymond James analysts said, “The LNG market looks to be oversupplied in the near term, and US imports could surge if gas rises above $4/Mcf.”

In other news, Canadian oil sands are “back in fashion” after a “temporary hiatus away from the market's spotlight in the midst of the oil price meltdown of late 2008-early 2009,” Raymond James analysts said. “Considerable improvements on the economic front over the past 12-plus months have led to a resumption of the impressive development growth curve within the space. Greatly improved oil prices, low natural gas prices, and record low light-heavy differentials are all factors that have contributed to a more constructive environment for oil sands development. As a result, we have seen a number of companies resume or push forward development plans, and we expect this trend to continue as 2010 progresses.”

The analysts also reported Latin America's resource nationalism is back with a vengeance. Rafael Correa, leftist president of Ecuador, the smallest producer within the Organization of Petroleum Exporting Countries, said a bill will shortly be introduced to allow expropriation of those companies that refuse to convert their existing production-sharing contracts into service contracts. “The government has been pushing for this conversion over the past year, but so far no companies have agreed, given the inevitable cut in their economics. Under the service contracts—similar to what Iraq is using—companies would receive a fixed per-barrel fee instead of being entitled to a certain share of the revenue,” said Raymond James. No US-based producers remain in Ecuador, but Brazil's Petroleo Brasileiro SA (Petrobras), Italy's Eni SPA, and Spain's Repsol YPF SA could be affected.

Energy prices
The May contract for benchmark US light, sweet crudes traded at $82.52-85.44/bbl Apr. 16 on the New York Mercantile Exchange before closing at $83.24/bbl, down $2.27 for the day. The June contract dropped $2.08 to $84.67/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.27 to $83.24/bbl. Heating oil for May delivery declined 3.54¢ $2.22/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 4.92¢ to $2.28/gal.

The May natural gas contract regained 5.4¢ to $4.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $4.13/MMbtu.

In London, the new front-month June IPE contract for North Sea Brent crude dropped $1.60 to $85.99/bbl. Gas oil for May fell $10.25 to $705.50/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 42¢ to $82.86/bbl. So far this year, OPEC’s basket price has averaged $76.46/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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