MARKET WATCH: Crude nears 8-week high above $81/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 4 -- Front-month crude jumped above $81/bbl Oct. 1, trading near an 8-week high in the New York market as positive consumer spending data diminished fear of a double-dip recession.

Competition among central banks to devalue currencies also made oil more of a haven for investors. Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Consumer spending in the US grew by 0.4% in August vs. consensus of a 0.3% increase, while personal income grew by 0.5% vs. consensus of a 0.3% growth. Now that the concerns about the double-dip recession and faltering economic recovery have eased, crude is again pushing towards $85[/bbl]. However, a sustained appreciation in prices would need a further trimming down of inventories.”

The broader equity markets “did not fully participate in the rally that drove oil futures up almost 2%,” said analysts in the Houston office of Raymond James & Associates Inc. The Standard & Poor’s 500 index was up a slight 0.2% and energy stocks followed suit with the oil service index and the SIG Oil Exploration & Production Index (EPX) up 0.1% and 1.1%, respectively.

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Leon Westgate said, “Oil had a sizable gain last week helped by dollar weakness, bullish [government] inventory figures, strong economic news from the US and China, and political instability in Ecuador. Front-month West Texas Intermediate jumped by $5.09/bbl for the week. Front product cracks vs. WTI were also higher….”

Westgate noted “a little wobble” in oil prices in early trading Oct. 4 “on the back of a recovery in the dollar vs. the euro.”

Natural gas futures “ended on the opposite end of the spectrum, sliding to their lowest levels in 3 weeks,” Raymond James analysts reported. “Despite weak natural gas prices, the Baker Hughes domestic rig count is still up 62% year-over-year. Overall, high supplies and a moderate weather outlook sent prices down 1.9%, undercutting prospects for a seasonal rally,” they said.

Gas prices slipped 8.4¢ or 2.2% for the week “on dissipating weather support and larger than expected storage build,” Sharma said. “We expect prices to remain soft this week as temperatures are expected to be mostly normal across much of the country while the demand is expected to remain weak until the heating season kicks in. However, as growth in drilling activity has now largely stalled and the shift to the oily plays continues lowering the effective dry gas rigs, we expect supply to stabilize after likely having peaked in August,” he said.

Raymond James analysts expect natural gas to be range-bound at $3-6/Mcf over the next 5 years, but that doesn’t necessarily “put a lid” on future US coal prices. “A confluence of factors including declining production (due to increasingly challenging geology, regulations, permitting, and costs), incremental export opportunities, and additional demand from newly constructed power plants could drive near-term coal prices higher even in a depressed natural gas pricing environment,” they said. “Production challenges will likely be the most relevant issue in the near-term, but surging Asian coal demand should create meaningful export opportunities for US coal producers in the coming years.”

On the other hand, ICF International, a consultant service in Fairfax, Va., projects Henry Hub gas prices will average $5-7/MMbtu through 2030. “Prices will be high enough to support the robust supply development projected over time, but not so high as to adversely influence market growth,” said ICF analysts.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “In the main world stock markets, the global picture has not really changed. Asia (and especially China) is trailing and the best returns are obtained in the Atlantic Basin, a region that is dependent on all sorts of artificial government support.”

He said, “The problem is that all markets are now trading not on their core fundamentals but purely on liquidity expectations. If the economic numbers are worse than expected, then expectations of [US Federal Reserve Chairman Ben S.] Bernanke launching [a second round of ‘quantitative easing’ of the economy (QE2)] increase and assets get bid purely for the liquidity bubble ride. QE1 [the Fed's earlier purchase of debt to prop up the housing market and credit facilities for big banks] and the QE ‘Lite’ of September have done nothing for jobs and nothing for the economy, as evidenced by the amount of cash that is sitting in the vaults of the US banks and the continued decline of commercial loans.”

Before launching QE2, Jakob said, “The Fed will have to slash its gross domestic product forecast for next year (a cut of 1% is widely expected) and explain that it has to resort to QE2 because the economy is suffering from insufficient growth. Now, as a company, are you going to rush to get loans for massive investment projects and hire thousands of new employees when the Fed is revising its view on the economy lower? Probably not, and the amount of cash that is currently being un-used by banks is a testimony that the problem is more on the demand side than on the supply side.”

Analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, noted ICE Brent futures “broke decisively above $80/bbl,” testing the $83/bbl resistance level by the end of the week in a rally that reflected a renewed market focus on demand growth in China.”

KBC analysts said, “The rally, which marked the biggest monthly gain in crude futures in nearly 1½ years, came despite a fresh round of worries over European debt. Ireland moved into the spotlight this week as its government took drastic steps to prop up the country’s over-extended banking sector with a bail out of Allied Irish Bank, a measure that is virtually guaranteed to result in austerity measures for years ahead. Rescuing the banking sector could cost Ireland (or more likely its tax payers) €50 billion, representing more than a third of 2009 national income. Meanwhile, Spain saw its debt downgraded by Moody’s, the third ratings agency to take this step. Europe’s ongoing economic woes have depressed crude prices to around $70/bbl on a number of occasions earlier this year, and recently prices have struggled to make headway above $80/bbl because of fears that China’s economic growth was slowing. But the latest manufacturing data from the country would suggest otherwise.”

In other news, KBC analysts said workers at the oil port of Fos, Lavera, in southern France launched rolling strikes to secure jobs and pensions, as the European “autumn of discontent” continued. Tens of thousands of people marched on the European Union's Brussels headquarters on Sept. 29 in a series of coordinated protests against austerity measures that included Greece, Spain, Portugal, Ireland, Slovenia, and Lithuania. The Lavera strike blockaded 24 vessels from the port, 9 of which are reported to be carrying crude while 15 product tankers and some gas vessels were also affected. The French Union for Petroleum Industries (UFIP) said operations at seven of the eight refineries in France and Switzerland that are dependent on Lavera are now at risk.

Energy prices
The November contract for benchmark US light, sweet crudes jumped by $1.61 to $81.58/bbl Oct. 1 on the New York Mercantile Exchange. The December contract escalated $1.55 to $82.50/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.61 to $81.58/bbl. Heating oil for November delivery increased 2.6¢ to $2.29/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 5¢ to $2.09/gal.

The October natural gas contract dropped 7.5¢ to $3.80/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 16¢ to $3.67/MMbtu.

In London, the November IPE contract for North Sea Brent crude gained $1.44 to $83.75/bbl. Gas oil for October climbed $13 to $719.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $2.04 to $79.52/bbl. So far this year, OPEC’s basket price has averaged $75.27/bbl, up from an average $61.06/bbl for all of 2009.

Contact Sam Fletcher at samf@ogjonline.com.

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