MARKET WATCH: Dubai financial crisis undercuts oil price

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 30 -- Crude prices were relatively flat in early trading Nov. 30 in the New York market after falling 2.5% Nov. 27 after the Dubai World holding company’s pre-Thanksgiving announcement it would seek at least 6-month reprieve on repayment of $60 billion in debts. The company is flag bearer for Dubai in global investments.

In Houston, however, analysts at Raymond James & Associates Inc. said, “The UAE’s recent statement that it would back lenders against a possible default by the conglomerate has helped to calm the situation. Prior to the opening bell, markets appeared to be focusing on these positive developments despite breaking news that yet another supertanker headed to the US has been hijacked off the coast of Somalia.”

They reported, “Last week natural gas prices popped nearly 10%, and gassy stocks were up about 5% in a relatively flat broader market tape. One of the primary catalysts of this move was the increasing awareness of a potentially bullish Energy Information Administration gas supply data to be released today.” Raymond James said, “Given the strong gas stock move last week, it now appears that market expectations are already factoring in a bullish number.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The reversal in natural gas could also be attributed to comments from PetroChina Co. Ltd. that China will not be able to maintain natural gas supplies in December and January if current consumption trends continue. It is reported that pressure in China’s gas pipelines has fallen to the lowest level required to maintain minimal operations. The Chinese have curtailed natural gas supplies to industrial users in order to meet residential demand. This report should reduce concerns regarding LNG shipments to the US, and support the recent gains in the US natural gas price.”

US dollar outlook
Olivier Jakob at Petromatrix, Zug, Switzerland, said fear of a financial default by Dubai erased most of the energy equity gains earlier last week on world markets. The falling US dollar on Nov. 25 “did bring some support to crude but not enough to bring it back to its longer term correlation value,” he said.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts noted the US dollar closed Nov. 25 “at its weakest level ($1.505) vs. the euro since Aug. 7, 2008.” They reported, “Two reasons were widely cited for this: first, a statement by the Federal Reserve that the recent decline of the dollar is seen as ‘orderly,’ suggesting that it has official approval of a kind; second, an extraordinary announcement by the Russian central bank that it was considering investing ‘some’ of its foreign exchange reserves in the Canadian dollar.” They described it as “the latest twist in the slow death of the dollar.”

Jakob said, “The only time we experienced such a low dollar was in the first half of last year and what followed was a recession of historic proportion. It is now cheaper for the European consumer to buy European-made products in the US and to import them back to Europe, and at the current value of the euro it is becoming more likely that European exports will start to falter and the European economy recovery will have to wait a little longer. The dilemma now becomes: how do you continue to sell the dollar to support the market price of equities and commodities without hurting the fundamentals of equities and commodities?”

He added, “In the week ending Nov. 18, cash assets hoarded by banks in the US increased by $30 billion and are still close to $1 trillion above the levels of the same weeks in 2007. It is that much money that has not worked its way back to the real economy as US bank loans are still in a declining trend.”

Pritchard Capital Partners said, “As the market sentiment for the dollar remains negative, which bodes well for crude prices, increased geopolitical risk could spark a sharp rally in the dollar, similar to what the market saw in July 2008 when the US Dollar Index climbed roughly 16 points over a 4-month period while crude oil dropped from its cyclical highs. While a rally in the dollar would likely pressure the commodity trade, crude oil specifically, we believe increased US and BRIC [Brazil, Russia, India, and China] demand will keep prices from repeating the 2008 collapse in crude.”

KBC analysts said, “We keep making the point that for the developed economies there is little sign that demand is improving—yet. Everybody talks about demand recovery but lift-off keeps being postponed.”

Energy prices
The January contract for benchmark US light, sweet crudes dropped $1.91 to $76.05/bbl Nov. 27 on the New York Mercantile Exchange. The February contract was down $1.83 to $77.36/bbl. Heating oil for December delivery declined 2.79¢ to $1.96/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month fell 7.14¢ to $1.93/gal.

The January natural gas contract gained 2.9¢ to $5.19/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $3.57 MMbtu.

In London, the January IPE contract for North Sea Brent crude was up 19¢ to $77.18/bbl. Gas oil for December dropped $5.75 to $605/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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