MARKET WATCH: Crude, products give up gains from rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 2 -- Prices for crude and petroleum products fell Oct. 30, wiping out gains for the previous day’s rally in the New York market, as the dollar strengthened against most currencies and US consumer spending fell amid doubts the economy is improving.

In New Orleans, analysts at Pritchard Capital Partners LLC confirmed, “Crude oil fell on concerns that the US economy is losing its momentum. Consumer spending fell 0.5% in September after a 1.4% increase in August. Some of the decline in consumer spending was attributed to the expiration of stimulus programs such as the ‘cash-for-clunkers’ program. The implication of the lower consumer spending figure is that without stimulus money the consumer will not spend, and the economy will suffer. The Volatility Index (VIX) [on the Chicago Board of Exchange] had its largest 1-day increase in 2009; the VIX jumped 20% to 31. The dollar followed the VIX higher, and the US Dollar Index traded higher pushing crude and commodities lower.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The dollar index being higher was of course a key input into the strong volatility in the equity and oil markets and further volatility is to be expected this week given the avalanche of dollar-important data that will be thrown at the global markets. On the 2009 daily oil-to-dollar correlation, crude oil narrowed some of the gap seen earlier during the week and finished the week only $1/bbl higher than the correlation calculated value.”

However, analysts in the Houston office of Raymond James & Associates Inc. reported Nov. 2, “Crude is rallying off its 2-week low this morning upon news that China's manufacturing sector expanded in October at its quickest pace in over a year and a half, as well as expectations for data from the US manufacturing sector to show a third consecutive month of growth.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “Whatever doubts we may have about the outlook in the US and other developed countries, it looks as if the Asian economies will power ahead in 2010. The International Monetary Fund published major upgrades to the outlook for most countries. For example, Japan’s gross domestic product growth in 2010 will be 1.7% (vs. 0.5% estimated previously), Australia 2% (vs. 0.7%), China 9% (vs. 7.5%), South Korea 3.6% (vs. 1.6%), and India 6.4% (vs. 5.6%). This is good news for oil demand because all the growth expected in 2010—about 900,000 b/d and possibly more—will come from these countries and the Middle East oil economies. Our old friend the Baltic Dry Index—a good proxy for the health of world trade—went back above 3,000 recently for the first time since early April, having slipped to 2,100 in the meantime. Activity is definitely on the up.”

Raymond James analysts said, “Russia, the world's largest crude producer, increased production 1.8% in October compared to levels seen last year. Additionally, the Organization of Petroleum Exporting Countries’ production for October was the highest in almost a year, averaging 28.76 million b/d, a jump of 80,000 b/d over September. Despite the higher production, encouraging data points of economic recovery have led crude prices to improve over 10% since the start of October. Separately, natural gas is trading relatively flat in the premarket this morning.”

Pritchard Capital Partners said, “Natural gas outperformed the broader market and at one point was up 4% after the Energy Information Administration 914 [monthly natural gas production report] was released. The EIA reported that total US [production] fell 0.5% to 70.22 bcfd. The data shows production is in decline, but declining at a slower rate than seen in July when production declined 1.5%. The decline is a move in the right direction, and we expect the decline to continue in the next report as the rig count decline and the shut-ins weigh on US natural gas production.”

Still the gas market is “becoming more fearful” that 2010 production declines will not be “abrupt enough” to drive prices much above $5/Mcf. Pritchard Capital analysts see a “clear trending up” of gas production from the Marcellus, Haynesville, and Fayetteville shales while other basins are likely shrinking. Meanwhile, Qatar reportedly is cutting its to LNG exports, leading to higher spot cargo prices in Japan and a possible carryover to Europe and the US this week, analysts said.

Energy prices
The December contract for benchmark US light, sweet crudes traded as high as $80.21/bbl before closing at $77/bbl, down $2.87 Oct. 30 on the New York Mercantile Exchange. The January contract lost $2.76 to $77.64/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.87 to $77/bbl. Heating oil for November declined 7.31¢ to $1.98/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dropped 7.58¢ to $1.94/gal.

The December natural gas contract continued to fall, down 1.7¢ to $5.05/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 5¢ to $4.15/MMbtu.

In London, the December IPE contract for North Sea Brent crude dropped $2.84 to $75.20/bbl. Gas oil for November fell $19.25 to $624.75/tonne.

The average price for OPEC’s basket of 12 reference crudes lost 38¢ to $75.56/bbl Oct. 30. So far this year, OPEC’s basket price has averaged $58.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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