MARKET WATCH: Crude falls below $70/bbl to 7-month low

Energy prices continued to tumble May 18 in the New York market, pulled down by the euro in its plunge to a 4-year low.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 19 -- Energy prices continued to tumble May 18 in the New York market, pulled down by the euro in its plunge to a 4-year low. Crude closed down 1.2% at its lowest level in 7 months, below the $70-80/bbl price band favored by the Organization of Petroleum Exporting Countries, after first climbing 3.5% earlier in the session.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “As West Texas Intermediate was reaching a key technical zone for the creation of a price bottom, Germany pushed the euro again off the cliff by adopting a surprise measure on short selling on credit default swaps and financial institutions. This is taken by the global markets as politicians hitting the panic button again and will not strengthen confidence in the safe haven capacity of the euro.”

Jakob said, “There is not much that OPEC can do against the free-fall of the euro. Moving back to stronger compliance could support oil prices but given the strength of the dollar it would only suffocate a bit more the non-dollar economies and will be negative on global oil demand. Large speculators have been adding to the short side on WTI and if the trading theme of selling Europe accelerates, then it should translate into more selling on oil as an alternative of being long the dollar.”

He added, “The June-July WTI contango spread was narrowing yesterday until Germany brought back more risk aversion in the market, and with the contango now back below $3/bbl, there will be a record exercise of spread options at the close today.”

In Houston, analysts at Raymond James & Associates Inc., observed, “Oil continues to take its cue from both the dollar and the general market.” Natural gas prices also declined, “down 1.1% on some profit-taking despite a warmer-than-usual weather outlook that could spur demand,” they said.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Earlier in the day, natural gas prices appreciated after the Commerce Department reported US housing starts in April rose to an annual rate of 672,000, more than the economists’ estimate of 650,000, and to the highest level since October 2008. However, natural gas pared gains later in the day after taking cues from crude oil and equity markets. Natural gas had advanced in five of the past seven trading sessions on signs of increasing demand from the power generation and industrial consumers. Prices are likely to find support at these levels as above average temperatures in much of the US this week will result in the increased cooling demand.”

US inventories
The Energy Information Administration said May 19 commercial US crude inventories increased by 200,000 bbl to 362.7 million bbl in the week ended May 14. The Wall Street consensus was for a gain of 400,000 bbl. Gasoline stocks were down 300,000 bbl to 221.8 million bbl, well short of an expected drop of 900,000 bbl. Distillate fuel inventories fell 1 million bbl to 152.8 million bbl in a sharp contrast to market expectations of a 1 million bbl gain.

The American Petroleum Institute earlier reported a 794,000 bbl decline in US crude stocks to 363.5 million bbl for the same period. It said gasoline inventories were up 122,000 bbl to 221.4 million bbl. Distillate stocks were down 331,000 bbl to 146.6 million bbl.

Imports of crude into the US increased 142,000 b/d to 9.8 million b/d in the week ended May 14. In the 4 weeks through that date, US imports of crude averaged 9.8 million b/d, up 686,000 b/d from the comparable period a year ago.

The input of crude into US refineries increased by 156,000 b/d to 15.2 million b/d in the latest week with units operating at 87.9% of capacity. Gasoline production increased to 9.2 million b/d. Distillate fuel production decreased to 4.2 million b/d.

EIA’s report showed distillate demand of 4.1 million b/d—“the highest weekly total since February 2009,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “Over the past 4 weeks, demand for light products is 4.8% ahead of year-ago levels, according to the EIA (vs. 2.8% last week), due to rising distillate consumption.” However, gasoline consumption remains lackluster, 1.5% below year ago levels, he said.

Rousseau said, “We estimate that the average US refining margin increased from approximately $11.79/bbl to $14.81/bbl over the past week (vs. an average of approximately $12/bbl in 2008 and $9/bbl in 2009).” The price differential between WTI and Mexico’s Maya crude averaged $7/bbl last week, below the 2010 average thus far of $9/bbl. “This spread averaged approximately $5/bbl in 2009 and $16/bbl in 2008,” he said.

Energy prices
The June contract for benchmark US light, sweet crudes dropped 67¢ to $69.41/bbl May 18 on the New York Mercantile Exchange. The July contract was down 52¢ to $72.70/bbl. Heating oil for June delivery declined 2.37¢ to $1.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was unchanged at $2.04/gal.

The June natural gas contract fell 5.6¢ to $4.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained. 6.5¢ to $4.35/MMbtu.

In London, the July IPE contract for North Sea Brent crude dropped 67¢ to $74.43/bbl. Gas oil for June increased $1 to $638.25/tonne.

The average price for OPEC’s basket of 12 reference crudes declined 48¢ to $72.77/bbl.

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