MARKET WATCH: Energy prices continue to fall as recovery hopes dim

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 6 -- Crude futures prices fell July 2 for the third consecutive session on the New York market as the US Department of Labor reported the loss of 467,000 nonfarm jobs in June.

The job losses were greater than expected, and followed a loss of 322,000 jobs in May (OGJ Online, July 2, 2009).

“The nonfarm number raised some concern that the US economy may experience a ‘W’ shaped recovery. Obviously, if this were to occur, the broader stock market and commodities could give back some or all of the most recent gains,” said analysts at Pritchard Capital Partners LLC, New Orleans.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “With economic news still gloomy, oil demand sluggish, stocks plentiful, and no supply-side disruption in sight, we could be on the verge of a short-term downward price correction if speculators cut back their net length in the market. The Dow Jones Index has fallen 6% since its peak on June 12, and there is a growing perception that although recovery will come, it will not be tomorrow.”

Prices were still falling in early trading July 6, as the New York market resumed business after the 3-day US Independence Day holiday, July 3-5. In Houston, analysts at Raymond James & Associates Inc. said, “Crude oil is trading around a 5-week low as the US dollar strengthened and concerns of a prolonged global economic slowdown continue to impact sentiment.”

Meanwhile, the American Automobile Association reported US gasoline demand over the Independence Day weekend dropped 2.6% from a year ago, as motorists drove less over the holiday.

KBC Market Services analysts said, “The great white hope of the oil market, namely that the US gasoline season will provide some impetus, is just not happening yet. Gasoline stocks have increased for 3 consecutive weeks on the back of rising refinery output and strong imports.” The Energy Information Administration report of US gasoline demand growth in the 4 weeks ended June 26 was still below 1% (OGJ Online, July 1, 2009). “For the total oil products market, 4-week demand in the US is 6% down on last year, mainly reflecting the catastrophic state of the distillate market. This is not the sign of a market about to turn,” KBC analysts said.

Raymond James analysts said, “Given recent global energy intensity trends and the uncertain pace of a global economic recovery, the growth outlook for global oil demand is not particularly robust. Quite simply, rising oil prices, evolving technology, and government prodding are likely to continue to retard oil demand growth to levels well below global economic growth. For energy investors, that is the bad news.

The good news, however, is oil production by countries outside the Organization of Petroleum Exporting Countries “is likely to fall sharply over the next several years.” Raymond James analysts reiterated, “The global oil market appears to have crossed over into the realm of Hubbert's Peak, and scarce supply should gradually emerge as the ultimate limiting factor on oil consumption. With falling supply, only a modest improvement in global oil demand will quickly drive OPEC back to the brink of exhausting its spare capacity (likely in 2011 or 2012). When that becomes visible to the oil market, oil prices will rise. The bottom line is that the world will need to consume less oil due to falling oil supply over the next 5-10 years. Higher oil prices will be the primary mechanism that forces this conservation. As prices rise, better technology and more government prodding (though both taxes and incentives) will help facilitate less oil demand.”

In other news, officials said intraday crude futures price jumps on June 30 apparently were the result of unauthorized trades by an employee at PVM Oil Associates Ltd., London, resulting in losses of $10 million for the company. As a result, benchmark US light, sweet crudes topped out at an intraday high of $73.38/bbl while in the London North Sea Brent crude crested intraday at $73.50/bbl in overnight electronic trading, price levels unmatched for more than a year. The benchmark US crude on the New York market closed July 2 down $7.75/bbl from that false peak, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Energy prices
The August contract for benchmark US light, sweet crudes dropped $2.58 to $66.73/bbl July 2 on the New York Mercantile Exchange. The September contract dropped $2.53 to $67.74/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.58 to $66.73/bbl. Heating oil declined 6.48¢ to $1.70/gal on NYMEX. RBOB for the same month was down 6.82¢ to $1.79/gal.

The August natural gas contract dropped 18¢ to $3.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 13.5¢ to $3.51/MMbtu. Pritchard Capital Partners said, “Natural gas fell despite the EIA report that showed a natural gas storage injection of only 70 bcfe [during the week ended June 26] vs. the 75 bcfe estimate. This is the second consecutive week where the natural gas storage injection came in lower than the forecast, yet natural gas traded lower after each report. Clearly, the market is currently giving zero credit for the supply impact that should come from shut-ins and the rig count reductions.”

In London, the August IPE contract for North Sea Brent crude dropped $2.14 to $66.65/bbl on July 2. July gas oil lost $21.75 to $535.25/tonne.

Since OPEC doesn’t observe the US Independence holiday, it reported the average price for its basket of 12 reference crudes dropped $2.22 to $67.04 on July 2 and continued its decline to $66.21 on July 3. So far this year, OPEC’s basket price has averaged $51.27/bbl.

Contact Sam Fletcher at [email protected].