MARKET WATCH: Weak European economy, mild weather reduce energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 8 -- Front-month crude prices continued to fall Sept. 7 while natural gas gave up a large segment of its gain from the previous session in the New York market.

With no major new US economic data, the markets looked to Europe for indicators. “Unfortunately, the outlook there was less than rosy, and the Standard & Poor’s 500 fell 1.2% on concerns of the financial position of European banks,” said analysts in the Houston office of Raymond James & Associates Inc. “As the euro gave up ground against the dollar, crude prices followed the market down dropping 0.7%.”

Natural gas prices fell 2.2% “as worries about Tropical Storm Hermine subsided and weather reports predicted cooler temperatures for next week,” Raymond James analysts reported. Hermine had no major effect on offshore operations as it passed quickly through the western Gulf of Mexico and made landfall at near-hurricane strength in northern Mexico late on Sept. 6. The weakened storm has since moved into South Texas, again with no major effect on production or refining.

“The dollar gained 1.5% against the euro after concerns about Europe’s financial health resurfaced,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “German factory orders posted the biggest drop since February 2009 declining 2.2% in July after surging 3.6% in June. Weaker than expected factory orders in Europe’s economic powerhouse took wind out of the euro’s sails as economists were expecting that the orders would gain 0.5%. The demand for the fuel is expected to drop anyway since the driving season is now over.”

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said crude prices remain range-bound ahead of this week’s inventory data from the American Petroleum Institute and the Department of Energy. Release of those reports is delayed this week because of the US Labor Day holiday.

“Largely consistent with seasonal patterns, US refinery utilization remains high, with utilization rates at 84.8% last week. We expect utilization rates to remain high throughout most of September,” said De Wet. “Gasoline inventory on a days-forward basis has risen from 23.4 days at the end of June to 24.1 days last week. Distillate days forward cover stands at a high of 47.9 days. However, despite the high refinery utilization rates, crude oil inventory is not declining. Crude oil coverage has steadily risen from 23 days at the start of August, to 24.1 days last week.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The current market dynamics continue to be driven by the wide movements in the West Texas Intermediate contango and the arbitrage between [North Sea] Brent [crude] and WTI.

He reported, “The contango plunge on WTI continues to move WTI to a very strong discount to Brent. The last time we had WTI moving at such a discount to Brent was in the last half of April. That was followed by a $22/bbl flat price drop in WTI in the first half of May. History does not necessarily repeat itself and the May sell-off in crude oil was coming from a higher flat price level, was helped by a sell-off in equities and the crude oil physical differentials in the North Sea were not as strong as today. However, in our opinion the equity rally of last week is still at risk given that there have been continuous outflows from equity mutual funds since early May (a record 17 consecutive weeks of outflows).”

Jakob said, “The widening of the contango on WTI is forcing better refinery margins in the US, and as crude is pricing itself to go into the processing units as well as into the storage tanks, we should expect to see a continued burdensome picture in US product stocks. We would expect the current WTI contango to spill negatively into the product time spreads over the next trading months.”

In other news, Pritchard Capital Partners said Henry Hub benchmark gas averaged $4.33/Mcf for the third quarter during bid week. That was up from averages of $4.09 in the second quarter of this year and $3.39 for the third of 2009. “Roughly two thirds of US gas supplies are sold under bid week,” the analysts said. “Currently, the 3-month forward curve is $4.08/Mcf, implying a negative year-over-year.” With an annual production increase of 3 bcfd, the analysts said, “We expect gas will likely to test low $3[/Mcf level] in the near-term,” they said.

Energy prices
The October contract for benchmark US light, sweet crudes dropped 51¢ to $74.09/bbl Sept. 7 on the New York Mercantile Exchange. The November contract lost 12¢ to $75.85/bbl. Subsequent monthly contract prices increased but remained in contango. On the US spot market, WTI at Cushing, Okla., was down 51¢ to $74.09/bbl. Heating oil for October] delivery gained 1.7¢ to $2.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.34¢ to $1.93/gal.

The October natural gas contract fell 8.7¢ to $3.85/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 7¢ to $3.82/MMbtu.

In London, the October IPE contract for North Sea Brent gained 87¢ to $77.74/bbl. Gas oil for September dropped $1.75 to $646.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell 44¢ to $73.02/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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