MARKET WATCH: Falling equity market brings down energy prices

Energy prices fell May 6 for the third consecutive session in the New York market as an “unheralded selloff” in the equity market pulled down commodities too.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 7 -- Energy prices fell May 6 for the third consecutive session in the New York market as an “unheralded selloff” in the equity market pulled down commodities too.

“If it was bad, it happened in the market yesterday,” said analysts at Raymond James & Associates Inc., Houston. “At its low, the Dow [Jones Industrial Average] was down 9% and on track for its biggest 1-day point decline in history, which many attributed to automated trading systems speeding up sell orders and possible erroneous trades. With gas prices down 1.5% and oil prices down almost 4%, there was little hope for energy stocks as the oil service and the exploration and production indices were down 4%.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The old adage is ‘sell in May and go away;’ right now it is more ‘sell in May and run away’ as there is currently a run for cash that has some of the looks of 2008. It was a run for cash that forced deleveraging in commodity indices in the last half of 2008, and we can not exclude a repeat of that scenario as commodity indices are moving deeper into negative returns and have to roll in a greater contango loss.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “Over the past month, crude prices did what they normally do in April, they increased,” with the front-month ICE North Sea Brent contract up more than $6/bbl. “This was twice the increase seen for the corresponding New York Mercantile Exchange’s light, sweet crude contract, which was again undermined by high stocks at Cushing, Okla.”

But now, they said, “In a dramatic turnaround, crude futures have plunged by more than $6/bbl over the past couple of days on an escalating eurozone debt crisis. Global equity markets have fallen sharply on growing fears of contagion from Greece to other…states in southern Europe.”

Wall Street’s influence
KBC analysts see “little change in weak global oil market fundamentals, with oil stocks still more than ample and growing discounts for prompt oil below forward crude futures.” They said, “The wild swings in outright prices are further confirmation of the ‘financialization’ of oil markets with oil price determination firmly in the hands of Wall Street.”

The price of West Texas Intermediate dropped more than 10% this week to $77/bbl, noted Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC. “Although many comments in the trade press cite the rise in the value of the US dollar as the main factor, we think another financial dynamic has been more important, Standard and Poor's 500 index,” he said.

“From January 2007 until the end of 2008, the movement of the US dollar and WTI prices was very strongly correlated. However, this correlation began to break down in 2009, and since October, when the dollar bottomed at 1.50 to the euro, only about 20% of the movement in WTI prices is explained by the euro-to-dollar rate,” Sieminski said. “For the last 6 months, oil was moving up as the dollar strengthened, just the opposite of what the long-term relationship would suggest.”

On the other hand, he said, “Starting in March 2009, the relationship between the broad stock market index and oil prices has been remarkably consistent; every 65-70 point gain on the S&P 500 has been worth about $5/bbl on the crude oil price. Since October 2009, over 60% of the movement in WTI prices is explained by the S&P 500. For the last 6 months, oil was moving up as the S&P 500 strengthened, just the opposite of the long-term inverse correlation between these two variables.”

In other news, Jakob noted, “This weekend will bring some weather risks, but the bullish risk of the oil spill in the US Gulf is now being joined by the bearish risk of the volcano [in Iceland] that is starting to erupt again.” He said, “Some transatlantic [air] routes are starting to be modified, and this will require increased monitoring as it comes at a time when some European refiners are coming out of maintenance and could start to weigh again on jet fuel differentials in northwest Europe.”

Meanwhile, he said, “The National Oceanic and Atmospheric Administration is somewhat struggling with its forecast path for the oil spill (we can easily guess that they have less historical data points on oil spills than on hurricanes). While the models had indicated a move towards the Southwest Pass today, recent observations from NOAA suggest surface oil is not crossing the Mississippi River convergence zone.”

Energy prices
The June contract for benchmark US light, sweet crudes fell $2.86 to $77.11/bbl May 6 on NYMEX. The July contract dropped $2.81 to $80.18/bbl. On the US spot market, WTI at Cushing was down $2.86 to $77.11/bbl. Heating oil for June delivery lost 7.08¢ to $2.11/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 6.41¢ to $2.16/gal.

The June natural gas contract dropped 6.2¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., slipped by 1¢ to $3.99/MMbtu.

In London, the June IPE contract for Brent crude decreased $2.78 to $79.83/bbl. Gas oil for May fell $16 to $683/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $2.60 to $78.52/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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