The Energy Report for Wednesday, June 2, 2010


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 percent 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 supermajors. 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 8345. Yesterday they closed at 7248. The price of oil really has been focused on other issues. You know, simple things like whether or not the euro zone 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 US 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 US oil production offshore and the possibility of expensive regulations and taxes. The December 2015 crude oil futures contract closed at apprx 9302 on the day of the spill making the spread between that and the front month contract $9.57 cents. That is an implied expectation that the price of oil will be about $9.57 cents a barrel higher in December 2015. Yesterday oil in the front end closed at apprx 7248 and in the December 2015 at apprx 8793. That is an expectation now that prices will be apprx $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.
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