MARKET WATCH: Crude closes at 8-month low

Despite a small gain in the previous session, the front-month crude contract fell 2.6% on May 20 in the New York market; natural gas declined 1%, continuing its downward spiral toward $4/MMbtu.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 21 -- Despite a small gain in the previous session, the front-month crude contract fell 2.6% on May 20 in the New York market; natural gas declined 1%, continuing its downward spiral toward $4/MMbtu.

“Crude breached psychological support of $65/bbl, touching $64.24/bbl in early trading, which is the lowest intraday price since July 30, 2009. The bearish sentiments took over the markets as the Conference Board’s index of US leading economic indicators unexpectedly fell 0.1% in April, the first drop in a year, and initial jobless claims in the US rose by 25,000 to 471,000 vs. consensus of 444,000. Due to the prevailing debt crisis in Europe and mixed economic signals, there has been a flight of risk capital from the market,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

Although crude “looks attractive on fundamentals” with a $70/bbl floor price “implied by current cost structures” in the New York market, Sharma said, “Uncertainty regarding the European debt crisis and to what extent it will affect growth in the European region will have to go down for risk capital to flow back into the market.”

Analysts in the Houston office of Raymond James & Associates Inc. said, “It appears there is still quite a bit of doubt regarding the resolution of Europe's debt crisis, as European and Asian stocks are trading lower this morning while the Dow Jones Industrial Average futures [were] trading in the red premarket (down more than 70 points).”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The Standard & Poor’s 500 [index] broke the support of the 200-day moving average and with the acceleration of the sell-off it is confirming the lows of ‘Flash Thursday’ [the sharp May 6 drop in the equities market].”

The recent increase in the volatility index (VIX) “is forcing some ‘derisking’ in the global portfolios” and is triggering the sale of oil, Jakob said. A similar surge in volatility in 2008 “led to deleveraging that forced a downside overshoot in crude,” he said. “On a fundamental basis, we do believe that oil is now much closer to the ‘fair-value’ area, but passive investors in commodity indices are being buried deeper and deeper through the contango losses and that still leaves West Texas Intermediate exposed to liquidation risk if the VIX does not recede.”

It’s “too early” to pick a bottom price for crude “when the global markets remain highly agitated and the risk of margin calls is increasing,” Jakob said.

Meanwhile, the Energy Information Administration reported the injection of 76 bcf of natural gas into US underground storage in the week ended May 14. That raised the working gas in storage to 2.2 tcf, up 73 bcf from the comparable period last year and 308 bcf above the 5-year average.

“Inventories are now 16.6% above the 5-year average as compared to 18.4% the prior week. This [latest] injection was more moderate compared to the 93 bcf injection [in the same period] last year mainly due to the colder-than-normal temperatures in the Northeast. We expect that above normal cooling demand next week will be supportive to prices at current levels,” Sharma said.

Energy prices
The June contract for benchmark US light, sweet crudes traded at $64.24-71.29/bbl May 21 on the New York Mercantile Exchange before closing at $68.01/bbl, down $1.86 for the day—“the lowest settlement since Sep. 29, 2009,” said Pritchard Capital Partners. The July contract declined $1.68 to $70.80/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.86 to $68.01/bbl. Heating oil for June delivery decreased 4.33¢ to $1.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dropped 5.07¢ to $1.96/gal.

The June natural gas contract lost 5.2¢ to $4.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 10.5¢ to $4.14/MMbtu.

In London, the July IPE contract for North Sea Brent crude was down $1.85 to $71.84/bbl. Gas oil for June dropped $16 to $601.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 93¢ to $69.64/bbl. The OPEC Secretariat in Vienna will be closed May 24.

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