MARKET WATCH: European bailout lifts oil price from 12-week low

The front-month crude contract fell below $75/bbl to an intraday low May 7 in the New York market, but rebounded in early trading May 10 after European policymakers came up with a $962 billion emergency loan in hopes of resolving the financial crisis of the euro zone.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 10 -- The front-month crude contract fell below $75/bbl to an intraday low May 7 in the New York market, but rebounded in early trading May 10 after European policymakers came up with a $962 billion emergency loan in hopes of resolving the financial crisis of the euro zone.

“Oil has climbed off its 12-week lows as fears that the crisis would derail the global economic recovery begin to subside,” said analysts in the Houston office of Raymond James & Associates Inc. “Gas continues to rise after posting a 2% gain [on May 7] despite another bearish storage report released last week. For the week ahead, look for the ‘manic’ markets to respond to any developments out of Europe and economic data.”

Like the infamous “Black Thursday” market collapse that triggered the Great Depression in 1929, “2010 will be known in the history books for ‘Flash Thursday’” on May 6—“a reference not only to the short time span of the market breakdown [on that date] but also…to the technique of ‘flash trading’ from high frequency traders,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

“If some of the lows of May 6 were somewhat artificial, the markets were nonetheless already in a steep descent before the flash fall and continued to fall on May 7,” Jakob said. “Nobody has yet explained what happened on ‘Flash Thursday,’ and it is possible that nothing specific has happened; flash movements can just be the inherent risk of having algorithmic machines trade more than 70% of the equity markets.”

Macondo backlash
Meanwhile, energy investors are trying to anticipate the likely impact of likely new regulations on the oil and gas industry and which companies ultimately will be held liable for punitive damages in the congressional outrage over the Macondo blowout in the Gulf of Mexico, said analysts at Pritchard Capital Partners LLC in New Orleans. Stock valuations of companies active in the gulf “were down approximately 10%, in-line with the sector average, suggesting that the oil spill…has been incorporated into valuations for the time being. On a positive note, most exploration and production companies reported either a reduction or no increase in their gas rig count,” they said.

US Secretary of the Interior Ken Salazar’s decision to halting issuance of offshore drilling permits for 3 weeks will only affect the jack up drilling market—rigs with their blowout preventers on the deck rather than on the seabed as with the deepwater floaters. “Interestingly, the rolling average of permits issued has been above 18/week for the past month, and the 3-week lag will not lead to any floaters stopping turning to the right,” said Pritchard Capital analysts. “However, the uncertainty into what happens after the end of May and how fast new permits are issued will still weigh on the stocks. We would avoid the mat rig guys with near-term contract rollovers but believe the other gulf jack up guys should not have adverse effects.”

Raymond James analysts said, “Despite the subdued atmosphere due to the Gulf of Mexico tragedy, we came away from [the 2010 Offshore Technology Conference] thinking that business is better than a year ago with hopes for a steady improvement for the remainder of 2010. Overall, inbound orders and activity are improving. Manufacturing companies have not really been able to push pricing higher yet, but business is much healthier than a year ago when the industry's focus was on implementing numerous cost-cutting measures (‘survival mode’).”

Energy prices
The June contract for benchmark US light, sweet crudes fell as low as $74.51/bbl in intraday trading May 7 on the New York Mercantile Exchange before closing at $75.11/bbl, down $2 for the day. The July contract dropped $1.67 to $78.51/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2 to $75.11/bbl. Heating oil for June delivery lost 3.42¢ to $2.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 3.12¢ to $2.13/gal.

The June natural gas contract gained 8.6¢ to $4.02/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 5.5¢ to $3.93/MMbtu.

In London, the June IPE contract for North Sea Brent crude was down $1.56 to $78.27/bbl. Gas oil for May fell $25.25 to $657.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $2.11 to $76.41/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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