Crude continues to sink

Prices drop on demand concerns

Crude oil prices ended lower at Nymex on Thursday, 13 May 2010. Long-term implications of the European Union's rescue package and its impact on the currencies, specially on the euro, bothered investors and raised question about global demand for oil in coming months. The strong dollar also affected prices.

On Thursday, crude-oil futures for light sweet crude for June delivery closed at $74.4/barrel (lower by $1.25 or 1.7%). For the month of April, crude rose 2.8%. For the first quarter of this year, crude rose by 5.5%. Year to date, crude is lower by 0.9%.

Prices are very much lower as compared to 3 July, 2008 settlement of $145.29 a barrel and an intraday high of $147.27 on 11 July, 2008, an all-time high. However, oil has also gained nearly 142% from a December 2008 nadir. That day prices settled at $33.87 a barrel following an intraday low of $32.40.

Traders continued to remain nervous today that in the long term how much financial aid will be pledged for euro zone countries that face tenuous fiscal conditions and also the issue of how those funds will be allocated efficiently and whether recipients can remedy their underlying problems. The long-term implication of this on the euro and worries about inflation also bothered investors.

In the currency market today, the euro dropped once again against the dollar. The dollar index, which measures the strength of the dollar against a basket of six other currencies rose by 0.6%.

Among economic data for the day, The Labor Department in US reported on Thursday, 13 May 2010 that the number of people applying for unemployment benefits essentially held steady at 444,000 in the latest week.

As per the report, claims fell by 4,000 in the week ended 8 May but the data was revised up by 4,000 for the prior week to a seasonally adjusted 448,000. Initial claims have fallen just 2.2% since the beginning of the year, but they are 29% lower compared with a year ago. The four-week average of initial claims, a better gauge of employment trends than the volatile weekly number, dropped by 9,000 to 450,500.

In the latest weekly inventory report, the EIA reported yesterday an increase of 1.95 million barrels in the nation's oil inventories for last week, slightly above expectations. The biggest surprise was a decrease in gasoline inventories by 2.8 million barrels, whereas market was expecting a small increase. Stockpiles of distillates, which include diesel and heating oil, rose by 1.4 million barrels. The refinery utilization rate dropped more than expected to 88.4%. Meanwhile, inventories at Cushing, Okla., the delivery point for Nymex futures, rose by 784,000 barrels to a record high on 37 million barrels.

The International Energy Agency yesterday lowered by 220,000 barrels a day its forecast for global oil demand for 2010. Oil demand is estimated to grow from 2009 by 1.9%, equating to 1.6 million barrels a day, to 86.4 million barrels a day.

In contrast, earlier this week, the U.S. Energy Information Agency raised its outlook for global oil demand to 1.6 million barrels per day in 2010, slightly higher than the 1.5 million barrels-a-day projection made last month. Separately, The Organization of the Petroleum Exporting Countries had also said on Tuesday it was raising its estimate for global oil demand for 2010. OPEC expects global oil demand to grow by 950,000 barrels a day to 85.38 million barrels a day. It previously expected growth of 900,000 barrels a day.

Natural gas prices reversed paths to trade higher on Thursday after a government report showed a smaller-than-expected increase in natural gas in storage. Natural gas for June delivery added 6 cents, or 1.3%, to settle at $4.34 per million British thermal units. Prices earlier hovered around their highest since March, but trimmed gains as other energy products remained under pressure. Natural gas prices rose after the Energy Information Administration reported an increase of 94 billion cubic feet of natural gas in storage in the week ended 7 May.

Crude ended FY 2009 higher by 78%, the highest yearly gain since 1999. It reached a high of $82 earlier in October 2009 and hit a low of $33.98 on 12 February 2009. Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.

At the MCX, crude oil for May delivery closed higher by Rs 21 (0.61%) at Rs 3,411/barrel. Natural gas for May delivery closed at Rs 196.6, higher by Rs 3.6 (1.86%).