MARKET WATCH: Slowing economy brings down energy prices, equity stocks

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 20 -- Equity markets hit their lowest point in more than a month with the Dow Jones Industrial Average down 2%, pulling the front-month crude contract down 1.3% Aug. 19 in the New York market.

“Crude settled at the lowest level since July 7 under an incessant barrage of bearish economic data,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. That included a report by the US Department of Labor that first-time claims for jobless benefits increased by 12,000 to 500,000 last week, the highest level since November. It marked the third consecutive weekly increase in initial unemployment claims (OGJ Online, Aug. 19, 2010).

“The jobless claims figure was so awful that it exceeded all economists’ estimates as surveyed by Bloomberg. The contraction in manufacturing activity in the Northeast, as indicated by the Federal Reserve Bank of Philadelphia’s general economic index falling to minus 7.7 in August, is causing further anxieties about the second-half slowdown in the economic activity,” Sharma reported.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The current macroeconomic data is a serious bearish warning flag both for gasoline (consumer confidence) and for diesel (industry could stay on the cautious side for a little longer).

Jakob said, “The fundamentals of oil are not pretty, and crude oil on a stand-alone basis should be priced at levels (i.e. $50-60/bbl) that force the Organization of Petroleum Exporting Countries [to cut production].” He said, “If the poor macroeconomics force some deleveraging, we have to be ready for the risk of sharp downward corrections.”

Although the Energy Information Administration reported a “bullish” injection of 27 bcf of natural gas into US underground storage in the week ended Aug. 13, “gas prices couldn't break the slump and fell 1.6%,” said analysts in the Houston office of Raymond James & Associates Inc.

The latest injection marked “the second earliest (after last year)” period that gas storage has exceeded 3 tcf, “despite an almost 15% hotter-than-normal summer,” said Sharma. “Without this weather support, storage would have been almost 200 bcf higher than its current level,” he estimated.

Raymond James analysts projected the Aug. 20 session “could be another rough one” with prices for oil, gas, and the broader equity market all down in early trading.

Analysts at Standard New York Securities Inc., part of The Standard Bank Group Ltd., reported, “A stronger dollar (or rather weaker euro) has seen crude oil come under further pressure [at midday Aug. 20] with front-month West Texas Intermediate prices dropping below $73.50/bbl for the first time since early July. With little in the way of fresh economic data to rescue market sentiment, crude oil will likely continue to track the dollar heading into the weekend.”

They said, “The outlook for crude oil prices has darkened somewhat over the past few weeks, particularly in the US where stocks of crude and products remain stubbornly high. Price-wise, however, we note that crude oil remains well within recent ranges. Current prices are actually little changed from where they were this time last year, with WTI occupying a $70-80/bbl range for the past 12 months now. Consequently, we believe technical patterns and exogenous factors still have a greater bearing on short and medium term price direction, with the market needing a dramatic improvement, or deterioration, in current conditions to shift prices out of this range for an extended period.”

In other news, the National Hurricane Center was tracking a relatively large area of bad weather off Cape Verde on Aug. 20. “There is a good probability that we will start next week with another tropical system traveling through the Atlantic,” said Jakob at Petromatrix. But with crude stocks in the Strategic Petroleum Reserve and commercial stocks of distillates and gasoline at record highs, he said, “For now we view a hurricane more as a solver to the US overhang of stocks rather than as problem, and that means that hurricanes in formation should price-in a lower fear premium vs. previous years.” A hurricane in the US Gulf of Mexico would have more effect on natural gas prices than on oil, he predicted.

Energy prices
The September contract for benchmark US light, sweet crudes dropped 99¢ to $74.43/bbl Aug. 19 on the New York Mercantile Exchange. The October contract fell $1.01 to $74.77/bbl. On the US spot market, WTI at Cushing, Okla., was down 99¢ to $74.43/bbl. Heating oil for September delivery declined 2.42¢ to $2/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month retreated 3.25¢ to $1.93/gal.

The September natural gas contract lost 6.8¢ to $4.17 on NYMEX. On the US spot market, gas at Henry Hub, La., was down 7¢ to $4.27/MMbtu. “The fast dissipating summer weather support is further weighing down on prices,” said Sharma. Although the front-month gas futures price initially increased Aug. 19 because of the lower-than-expected storage injection, he said, “The rally quickly lost steam on oversupply concerns in face of likely economic slowdown.”

In London, the October IPE contract for North Sea Brent crude fell $1.17 to $75.30/bbl, still at a premium to WTI. Gas oil for September declined 75¢ to $638.50/tonne.

The average price for OPEC’s basket of 12 reference crudes dipped 2¢ to $73.03/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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