Energy’s slide picks up speed

flovestock

From Thursday's Globe and Mail
Published Wednesday, May. 11, 2011 7:10PM EDT

Energy commodities’ slide from grace found new momentum as a crackdown on speculative trading, an unexpected spike in U.S. petroleum stockpiles and a resurgent U.S. dollar fuelled big declines in oil and gasoline prices.

The biggest losses were in the futures market for gasoline, where alarmingly high pump prices have been raising the ire of consumers on both sides of the Canada-U.S. border. On Wednesday, the benchmark futures contract on the New York Mercantile Exchange tumbled 23.76 cents (U.S.), or 7 per cent, to $3.1421 a gallon – at one point triggering a five-minute halt in trading across the Nymex energy segment by exceeding its daily decline limit of 25 cents. It was the first trading halt on Nymex since 2008.

Is a commodity bear growling? Nymex crude oil (CL-FT99.361.151.17%), meanwhile, slumped $4.89, or nearly 5 per cent, to $98.99 a barrel, wiping out most of oil’s gains from the first two days of this week. Crude is now down almost 14 per cent this month.

The slumping prices weighed heavily on Canada’s energy-rich stock market, as the S&P/TSX composite index (TSX-I13,419.74-222.32-1.63%) tumbled 222.32 points to 13,419.74.

The steep declines reflected a resumption of the sell-off in commodities in general, and oil and petroleum products in particular, that dominated financial markets last week. Market watchers said the raising of margin requirements by commodity-market operators – a move aimed at cooling excessive speculation – is causing hedge funds to scale back positions and sell holdings to cover margin calls. (A margin is the minimum amount of money an investor must put up with a broker when borrowing money to buy securities.) Another increase in the energy commodities’ margin requirements announced after Monday’s close by CME Group – which operates Nymex – was the key catalyst in Wednesday’s selling, market watchers said.

“We have capital pouring out of the commodity sector generally – and oil specifically,” said Henry Cohen, head of Full Cycle Energy Investment Management, an oil-and-gas-focused investment firm in Toronto.

He said the margin increases have a direct effect on oil and gasoline prices, because fund managers reduce their positions to compensate for the higher margins needed to maintain them.

John Kurgan, senior market strategist at retail commodities trader Lind-Waldock in Toronto, said the margin-related selling started with the CME’s decision last week to raise margin requirements in the runaway silver market. He said hedge funds were hit with margin calls and unloaded positions in other commodities, including oil and gasoline, to cover them.

Adding fuel to the fire Wednesday was the U.S. Department of Energy’s weekly petroleum-inventory report, which revealed a surge in gasoline stockpiles as well as a bigger-than-expected increase in crude supplies. The report suggested that the market’s fears about the effects of Mississippi River flooding on refineries have been overblown.

“We had a huge reversal of those fears,” Mr. Kurgan said.

Meanwhile, Europe’s renewed debt worries and a slowdown in interest-rate expectations around the world have caused investors to reverse their U.S.-dollar selling and embrace the battered currency – driving down commodities in general, as they are priced in U.S. dollars.

The Thomson Reuters-Jefferies CRB index, the global benchmark for commodity prices, slumped 3 per cent Wednesday, after losing 9 per cent last week.

Kyle Cooper, energy analyst with Houston-based energy investment advisory firm IAF Advisors, said that speculative long positions in oil remain at historic highs. “If all these net longs have to get out, the decline could be severe.”

Analysts believe oil prices should be headed toward $90 a barrel. And, they say, supply-and-demand fundamentals dictate a decline in prices, as troubles in Libya and elsewhere haven’t put a large strain on supplies, while soaring gasoline prices are threatening to choke off demand.

“The first couple of weeks of summer driving season [a traditionally heavy-demand period from Victoria Day to Labour Day] will be telling, in terms of the impact on demand,” said Mr. Cohen.