MARKET WATCH: Energy prices rally as dollar weakens

Sam Fletcher
Senior Writer

HOUSTON, Aug. 20 -- Energy prices rallied Aug. 19 as the US dollar posted its biggest 1-day fall in a month in a readjustment of its 9% rise against the euro since mid-July.

"A rebound in the euro as West Texas Intermediate was again approaching the $112/bbl support line might have triggered some short covering, but the energy markets got nervous as well when some of the computer models started to show a risk for Tropical Storm Fay to turn into a boomerang storm," said Olivier Jakob at Petromatrix, Zug, Switzerland. Fay is moving off the east coast of Florida where some meteorologists see a 60% chance that the storm will turn south and emerge into the Gulf of Mexico early next week, where it may reintensify and threaten offshore oil and gas production.

At the Houston office of Raymond James & Associates Inc., analysts noted, "Volatility within the energy space remains high." They said, "While Georgian-Russian tensions remain problematic, BP PLC hopes to restart [oil] production from its 1 million b/d Baku-Tbilisi-Ceyhan pipeline next week. While additional supply should depress prices further, fears over the Russian withdrawal, or lack thereof, has actually helped to boost prices in premarket trading." Moreover, several "price hawk" members (Venezuela, Libya, etc.) of the Organization of Petroleum Exporting Countries are calling for production cuts at the group's Sept. 9 meeting.

In New Orleans, Pritchard Capital Partners LLC analysts reported Aug. 20, "Futures markets are ticking a bit higher this morning with crude oil hovering just under the $115/bbl level. Refined products are also up a bit with the market looking to post a second straight day of gains. This morning the markets will get some fresh fundamental data from the Department of Energy with predictions for a small crude oil build and draw on gasoline supplies. Also making some headlines this morning is Goldman Sachs Group Inc. sticking with its forecast for $149/bbl oil by the end of the year."

Raymond James analysts said, "For months, crude has escalated, looking for the price that curtails demand. Well, that price looks to be just under $150/bbl. After peaking at $147.27/bbl in early July, crude has crashed back down, ending the month down over 11% and currently down nearly 25% from its peak. Given supply constraints, we view the sell-off as a short-term correction within the context of a sustainable oil bull market."

They said, "Our bullish outlook had continually underestimated oil prices. Despite falling oil demand [within the Organization for Economic Cooperation and Development] and signs of slowing non-OECD demand growth, oil prices remained stubbornly high, peaking at nearly $150/bbl. Long term (next 1-5 years), this price is justified by solid supply and demand fundamentals. Short term, the huge upswing in the overall commodities market and the depreciation of the dollar supported high oil prices, perhaps masking fundamental concerns over weakening demand. This came to a head in early July, as the market was faced with the possibility of declining non-OECD oil demand. The ensuing correction also benefited from a dollar rally, which climbed 5-10% vs. most major currencies. Given our belief that non-OPEC supply growth should remain limited, with Russian production the most recent example, we believe oil prices should remain at or above current levels."

US inventories
The DOE's Energy Information Administration reported Aug. 20 commercial US crude inventories jumped by 9.4 million bbl to 305.9 million bbl in the week ended Aug. 15, far outstripping the Wall Street consensus of a 1 million bbl increase. In the same period, gasoline stocks fell 6.2 million bbl to 196.6 million bbl, below the average range for this time of year and surpassing the consensus of a 2.8 million bbl decline. Distillate fuel inventories increased 500,000 bbl to 132.1 million bbl, short of expectations of an increase of 600,000 bbl. Propane and propylene inventories increased 1.6 million bbl to 50.8 million bbl last week.

Imports of crude into the US increased by 1.3 million b/d to 11 million b/d in that period. The input of crude into US refineries was relatively unchanged at 14.8 million b/d, however, with units operating at 85.7% of capacity. Gasoline production rose to 9.1 million b/d, and distillate fuel production increased to 4.4 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "A combination of low production, fewer imports, and seasonally rising demand led to a 5.6 million bbl decline (down 1.5%) to light product inventories (gasoline plus distillate plus jet fuel). However, given that demand growth remains very weak and refiners are operating well below capacity, we do not view this as the start of a positive trend. Our belief is that when refining margins rise, refiners will increase production and imports will rise, limiting any earnings gains for the refiners. A sustained improvement in the sector is unlikely to occur, in our view, until lower retail prices improve demand.

Jakob noted, "We are starting to enter a shoulder period, where the gasoline season is coming to an end and the heating oil season is still a few months away; making it more difficult to correctly react to the weekly stock changes. Hence, storm activity and the movement on the dollar might dominate as a direction input while oil trades in a range rather than in a trend. The MasterCard report on weekly gasoline sales at the pump is showing a drop of 7.8 % from a year ago, and the 4-week average is down 4.8%. While refiners are busy reducing stocks in front of the seasonal drop in demand, the MasterCard report is suggesting that the recent drop in prices had little impact on the consumer. In the similar week last year, the DOE showed strong draws of gasoline stocks, hence the year-on-year comparison, and the days-of-cover comparison will not get worse even if the DOE is showing another drop in gasoline stocks (seasonal)."

Energy prices
The September contract for benchmark US light, sweet crudes traded broadly at $111.64-116.65/bbl Aug. 19 before closing at $114.53/bbl, up $1.66 for the day on the New York Mercantile Exchange. The October contract advanced $1.65 to $114.54/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.65 to $114.53/bbl. Heating oil for September delivery increased 3.89¢ to $3.12 gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) gained 4.87¢ to $2.86/gal.

The September natural gas contract climbed 8.8¢ to $7.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 3.5¢ to $7.84/MMbtu. "Traders put in a new low for the move in September natural gas futures in early morning trade on Tuesday," Pritchard Capital analysts said. "Despite the gains, some market experts believe the bears are still running the show and that the market could still shear off another 40¢/MMbtu or so before it is finished." They said, "Traders right now appear to be focusing on storage and not tropical weather."

Raymond James analysts said, "After peaking at the beginning of July at $13.69/Mcf, natural gas ran into a wall, ending the month down over 30% and subsequently falling another 15% so far in August. Whereas decreased demand weighted on crude, substantial US supply increases doomed natural gas. For the month of May, domestic natural gas production increased an astonishing 4.8 bcfd (8%) on a year-over-year basis."

Meanwhile, Indonesian officials have said they will increase by fivefold prices of LNG to Japan and more than double the volume of exports, selling 25 million tonnes of LNG in 10 years starting in 2011. That would likely reduce LNG sales into the US.

In London, the October IPE contract for North Sea Brent crude advanced $1.31 to $113.25/bbl. Gas oil for September gained $6.75 to $1,010/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped 42¢ to $108.26/bbl Aug. 19.

Contact Sam Fletcher at samf@ogjonline.com.

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