Energy report: Spill bad for front month crude

BP spill impact on oil prices.

The BP oil spill finally had a noticeable impact on the front end oil futures. It drove them lower. That's right, lower. Oil futures got hammered as BP stock got obliterated and the “Top Kill” procedure in the Gulf spill was deemed a failure. Add to that there are talks of possible criminal charges against BP that has rattled investors. According to the Houston Chronicle shares of, “ BP have fallen 40% since the explosion of the Deepwater Horizon drilling rig on April 20, to $36.52, its lowest in more than a year. The decline has slashed almost $75 billion from BP's market value, leaving it worth about $114 billion and making it among the wimpiest of the super majors. By comparison, Exxon Mobil's market value is $278 billion, Chevron's is $145 billion and Shell's is about $163 billion.” Just yesterday BP shares fell over 13% which according to the Wall Street Journal was the biggest one-day percentage drop for the company since Oct. 3, 1974.

Now I know by the amount of questions I have been getting from reporters and clients, there is a sense of disbelief that the spill in the Gulf has not driven oil prices higher. Yet the truth is that in the front end they have not. The day of the Deepwater Horizon explosion, oil prices closed at $83.45. Yesterday they closed at $72.48. The price of oil really has been focused on other issues. You know, simple things like whether or not the Eurozone is going to fall apart, and whether the global economy is going to go into a double dip recession and whether China can carry the entire global economic recovery. As far as impact the pipe explosion has had on the oil supply, in the short term there is none. The market never knew that this oil existed and never counted on this oil. That explains why oil prices have fallen. It is because the market has been focused on demand expectations and a U.S. dollar that has regained some of its stature against the battered and shaky euro currency.

Longer term though we know that the spill will hurt expectations on future U.S. oil production offshore and the possibility of expensive regulations and taxes. The December 2015 crude oil futures contract closed at approximately $93.02 on the day of the spill making the spread between that and the front month contract $9.57. That is an implied expectation that the price of oil will be about $9.57 a barrel higher in December 2015. Yesterday oil in the front end closed at $72.48 and in the December 2015 at $87.93. That is an expectation now that prices will be $15.45 a barrel higher. That is actually down from a point when it was much higher than this which probably means that overall demand expectations are falling.

Still while the oil market looks like it is getting to roll over it seems that strong expectations from this week’s job report is keeping the market from collapsing. Even Vice President Joe Biden got into the jobs prognostication game by predicting that the upcoming May employment report would show a much larger number of jobs created than in the last month report when we saw an increase of 290,000 jobs. Of course those rising expectations are a double edged sword. If they fail to meet those lofty expectations then oil may be ready for another leg down.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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