MARKET WATCH: Front-month crude contract closes at 5-month low

The front-month crude contract dropped 2.1% to a 5-month-low closing May 17 in the New York market amid escalating concerns about Europe’s sovereign debt, but natural gas was up 2% in anticipation the approaching summer will increase demand for electricity for air conditioning.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 18 -- The front-month crude contract dropped 2.1% to a 5-month-low closing May 17 in the New York market amid escalating concerns about Europe’s sovereign debt, but natural gas was up 2% in anticipation the approaching summer will increase demand for electricity for air conditioning.

“The European crisis continued to dictate the euro-dollar relationship as the euro fell as low as $1.2235 against the dollar, the lowest level since April 2006,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. He noted the market was concerned the European debt crisis and austerity measures may derail economic recovery on that continent.

However, crude was up 3.08% in early trading May 18, while gas was up more than 1%.

“The strengthening economic recovery, fuel-switching induced demand from the power sector, the anticipated warmer weather, and lower LNG imports have provided price support at current levels despite the steadily increasing and unprecedented number of horizontal rigs drilling for natural gas,” Sharma said. “The market seems to be focusing on the silver lining of the drop in vertical rigs as a signal of a possible pull back in drilling activity in the near future.”

In other news, two workers were killed and two others injured aboard Diamond Offshore Drilling Inc.’s semisubmersible Ocean Ambassador when a lifeboat fell from its winch during routine maintenance. That was the third major offshore accident in less than a month, following the Deepwater Horizon blowout and the sinking of the semisubmersible rig Aban Pearl in the Caribbean off Venezuela’s eastern coast (OGJ Online, May 13, 2010). All of the crew aboard the Aban Pearl survived; it was owned by Aban Offshore Ltd., India's largest offshore drilling contractor in the private sector.

With those mishaps and “political scuttlebutt about the lack of regulations” will “most certainly” lead to enhanced safety operating procedures and stricter rig inspections, “especially in the Gulf of Mexico,” Pritchard Capital Partners reported.

Energy prices
The June contract for benchmark US sweet, light crudes traded as low as $69.27/bbl May 17 on the New York Mercantile Exchange before closing at $70.08/bbl, down $1.53 for the day. The July contract dropped $2.21 to $73.22/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.53 to $70.08/bbl. Heating oil for June delivery declined 7.54¢ to $1.99/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 8.77¢ to $2.04/gal.

“With Cushing inventories at record levels and refineries humming at 88% utilization, the American Automobile Association reported that prices at the pump fell for the 11th straight day,” said analysts in the Houston office of Raymond James & Associates Inc.

The June natural gas contract increased 8.6¢ to $4.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 9¢ to $4.35/MMbtu.

In London, the July IPE contract for North Sea Brent crude dropped $2.83 to $75.10/bbl. Gas oil for June fell $25 to $637.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $2.70 to $73.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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