MARKET WATCH: Strengthening yuan may lift energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 21 -- The front-month crude futures contract on June 18 regained some of its loss from the previous session in the New York market while the near-month natural gas contract gave back most of its earlier gain as it fell more than 3%.

Crude continued to climb above $78/bbl and natural gas also rose in early trading June 21 after China said over the weekend it plans to end the yuan’s 2-year peg to the US dollar and increase the flexibility of its exchange rate. China artificially depressed the value of its currency in that period to give its exporters a financial advantage over competing US companies. Now with an improved economy, the People’s Bank of China wants its currency to trade more freely. A stronger yuan would make dollar-based commodities cheaper, potentially increasing Chinese demand, said analysts in the Houston office of Raymond James & Associates Inc.

“Despite the largely political-based motives behind the decision, markets are interpreting the news as a sign that policymakers believe the economic recovery will prove sustainable,” Raymond James analysts said. “The Standard & Poor’s 500 index finished above its 200-day moving average for the third straight session [on June 18] despite the release of several bearish economic data points earlier in the week. The beaten-down energy sector outperformed [other equities] as the oil spill ‘fallout’ appears to have exhausted itself.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “At first read, anything with the name China on it is seen as bullish for oil, and the move is likely to bring some supportive buying from the global asset managers. However, China is already the main source of oil demand growth, and we are not sure that this will change anything. The growth of Chinese crude oil demand is due to the increased refining capacity and that growth of crude oil demand will occur with or without a greater fluctuation in the yuan.”

Jakob said, “China’s net imports of petroleum products has turned closed to flat in recent months, and as Chinese refineries are currently also dependent on exports of light petroleum products, we are not yet convinced that the greater yuan fluctuation will translate into a shift in the petroleum product trade. Hence, overall we are not yet convinced that the latest announcement on the yuan fluctuation will translate into a major change for the physical oil supply and demand, the impact potential being probably more other commodities than in oil.”

Crude prices held above $75/bbl last week, “but the rally still appears vulnerable to economic news,” said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK. “ICE Brent crude futures for August stood at around $78/bbl, while the same West Texas Intermediate contract month was at $77.50/bbl and the expiring July contract at $76.25/bbl. Although ministers of the Organization of Petroleum Exporting Countries appear to have relaxed considerably since the recovery in crude futures prices from below $70/bbl a fortnight ago, the latest economic data from the US surprised the market by their weakness, showing an unexpected rise in jobless claims and a slowdown in factory activity. There have also been lingering fears that the debt crisis in Greece would spread to other south European nations such as Spain, although these eased again towards the end of the week.”

They noted, “The latest data came hard on the heels of improving demand numbers from the Department of Energy, which reported that US distillate demand…was up by more than 12% on the year, while product demand as a whole was up around 6%, based on the 4-week averages. We reiterate our standing caution that these improving year-on-year comparisons will be accentuated by the severe and sustained downturns we saw in the US last year, just as the sharp year-on-year gains in China’s oil demand earlier this year will start to slow as the comparisons are made against an ever-improving base figure.”

Meanwhile, continued softness in the job market has limited crude’s price rise despite prevailing optimism the economic rebound will continue in the second half of this year. However, Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Persisting concerns about political activism in the energy sector has increased uncertainties in the market and is likely to propel prices higher; regulatory changes would not only defer some production into next year but would also increase the cost of future production.”

Nobuo Tanaka, executive director of the International Energy Agency in Paris, said global oil production may fall by 800,000-900,000 b/d by 2015 if other new projects in areas besides the US are delayed by 1-2 years.

In other news, Sharma said, “While prevailing higher-than-normal temperatures have been providing support to natural gas, we believe that the recent run-up in prices has had a lot to do with the short-covering [that] saw Sandridge Capital LP, a $1 billion energy hedge fund, lose almost 19% according to Reuters [news service]. We believe that Sandridge was not the only fund that found itself on the wrong side of the trade, as many other funds and banks’ prop desks got squeezed. We also believe that it will require persistently hotter-than-normal weather to support current price levels, because at $5/MMbtu, natural gas currently remains well above coal-to-gas switching parity price of $4.50.”

Energy prices
The July contract for benchmark US light, sweet crudes gained 39¢ to $77.18/bbl June 18 on the New York Mercantile Exchange after falling 88¢/bbl in the previous session. The August contract advanced 22¢ to $78.26/bbl. On the US spot market, WTI at Cushing, Okla., was up 39¢ to $77.18/bbl. Heating oil for July dropped 1.85¢ to $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.64¢ to $2.15/gal.

The July natural gas contract fell 16.5¢ to $5/MMbtu on NYMEX, giving up most of its gain from the prior session (OGJ Online, June 18, 2010). On the US spot market, gas at Henry Hub, La., continued to climb, up 1.5¢ to $5.15/MMbtu.

In London, the August IPE contract for North Sea Brent crude lost 46¢ to $78.22/bbl. Gas oil for July dropped $3.25 to $681/tonne.

The average price for OPEC’s basket of 12 reference crudes declined 11¢ to $75.13/bbl. So far this year, OPEC’s basket price has averaged $76.16/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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