MARKET WATCH: Economic worries slash energy prices

Energy prices fell sharply Feb. 4 with crude down 5%—its biggest 1-day loss in 6 months—in what analysts called a “PIIGS” stampede caused by growing concern that the troubled economies of Portugal, Ireland, Italy, Greece, and Spain could undercut the economic recovery of Europe and around the globe.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 5 -- Energy prices fell sharply Feb. 4 with crude down 5%—its biggest 1-day loss in 6 months—in what analysts called a “PIIGS” stampede caused by growing concern that the troubled economies of Portugal, Ireland, Italy, Greece, and Spain could undercut the economic recovery of Europe and around the globe.

The US Labor Department reported a bigger-than-expected increase of 480,000 new requests for unemployment benefits, up 8,000 from the previous week’s initial filings. That also encouraged the transfer of investments from energy commodities to the strengthening US dollar.

“The dollar index had been under pressure for most of the second half of 2009, but continued concerns about the stability of the eurozone are making the dollar regain its value as king of currencies,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The dollar index is now at the highest level since July of last year and on the euro correlation model, West Texas Intermediate remains overbought by about $10/bbl, given that the dollar index continued to rise as WTI was falling.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The overall market price action in conjunction with a stronger US dollar and weaker commodities suggest that the long-term outcome of the current economic crisis is one of low growth and minimal inflation. The 200-day moving average for the front month crude contract is approximately at $70.50/bbl, and this level should provide reasonable support for crude. Crude has traded above its 200-day moving average since May of last year.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said oil prices have remained relatively resilient in an environment of rising risk aversion. However, he warned, “This will not be able to persist . . . since a period of stronger oil prices is unlikely to be sustainable until global oil demand, including gasoline demand in the US, gets on more solid footing. US oil demand in January was still running at 2% below year-ago levels.”

Analysts in the Houston office of Raymond James & Associates Inc. said, “Natural gas was the only one unscathed [in the New York energy market], trading relatively flat after the Energy Information Administration reported a bearish withdrawal of 115 bcf, below the consensus estimate of 123-124 bcf.” The withdrawal EIA reported was for the week ended Jan. 29 and left 2.4 tcf of working gas still in US underground storage, up 199 bcf from year-ago levels and 150 bcf above the 5-year average (OGJ Online, Feb. 4, 2010).

US gas storage is “7% above the 5-year average, a dramatic improvement from the 20% level seen in the summer,” said Pritchard Capital Partners. “The weather forecast for the Northeast continues to provide support for natural gas, but that the home heating degree days are not matching forecasted withdrawal estimates is clear indication that industrial demand for natural gas has not yet rebounded and actual natural gas production is not declining.”

Sieminski noted, “The US gas rig count bottomed at 665 in July 2009. Since then rig counts have climbed by nearly 30%. November gas production data for the US show continuing strong gains in the shale regions, and the rig count pick up suggests that output may surprise to the upside in 2010 sustaining a fundamentally weak market in the absence of extreme weather.”

Cold weather forecasts helped offset the effect of the EIA report on gas trading in the Feb. 4 session. A fast-moving storm bore down from Illinois to the Mid-Atlantic states on Feb. 5, dumping 1-3 in. of snow along its route, closing schools, and cancelling flights. Government offices in Washington, DC, prepared to close early ahead of the storm.

Energy prices
The March contract for benchmark US light, sweet crudes traded at $72.42-77.17/bbl Feb. 4 on the New York Mercantile Exchange before closing at $73.14/bbl, down $3.84 for the day. The April contract dropped $3.89 to $73.54/bbl. On the US spot market, WTI at Cushing, Okla., was down $3.84 to $73.14/bbl. Heating oil for March delivery lost 8.42¢ to $1.94/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 8.54¢ to $1.95/gal.

The March natural gas contract dipped 0.3¢ but closed virtually unchanged at $5.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 10¢ to $5.44/MMbtu.

In London, the March IPE contract for North Sea Brent crude was down $3.79 to $72.13/bbl. Gas oil for February fell $29 to $588.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $2.41 to $72.73/bbl.

Contact Sam Fletcher at samf@ogjonline.com

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