MARKET WATCH: Crude oil price dips, ending 3-day rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 5 -- The front-month crude oil contract declined Oct. 4 after a 3-day rally last week in the New York commodities market as it followed the equities market down; the natural gas futures price also dropped for the third consecutive session.

“Despite a midday rally, oil prices fell 0.2% as the effects seen from the weakness in equities and a stronger dollar were slightly neutralized by the building speculation that repairs at the Houston Ship Channel will interfere with oil imports. Natural gas prices also dropped 1.8% and ended the day around $3.70[/MMbtu], a key support level and right around the 52-week low. So much for the winter rally, so far at least,” said analysts in the Houston office of Raymond James & Associates Inc.

On Oct. 3, a tug pushing three barges hit a 300-ft electric tower in the ship channel, causing high-voltage lines to sag dangerously close to the water. “Typically, 30-40 vessels pass through the channel on a daily basis to reach various terminals along the 25-mile waterway,” said Raymond James analysts. “The economic impact is expected to be minimal, assuming the channel reopens on schedule tonight, as refiners generally have at least a 3-day supply of gasoline and distillates on hand.”

Raymond James reported energy stocks were among the biggest losers in the equity market yesterday as the SIG Oil Exploration & Production Index (EPX) and the oil service index dropped 1.3 % and 1.9%, respectively. They said oil and equities were up in early trading Oct. 5 while natural gas prices were relatively flat.

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “Movements in crude oil time spreads seem contradictory to the market consensus of a build in US crude inventory over the last week. Front-to-back spread of both West Texas Intermediate and North Sea Brent crude continued to strengthen. The contango between the first and the 12th-month WTI contracts has narrowed by $1.40/bbl, compared to a week ago.”

On the other hand, ICE gas oil increased by more than $7/tonne Oct. 4 with no end evident in the strike by French port workers. “It was also reported that the strike might be joined by refinery workers. This is helping to keep the first 2 months ICE gas oil contracts in backwardation,” said De Wet.

He said, “In the current economic climate where countries compete in devaluing their own currencies, oil prices are influenced more by investment money seeking to preserve value than by either the real economy or the fundamental supply and demand balance. The trigger for oil to move out its current trading price range could well turn out to be new developments on monetary policies.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The stock market used to be an indicator of expectations on the economy; today it has become an indicator of expectations on government buying of assets, and we do not think that this will increase consumer confidence. When stock markets rise because the governments are artificially supporting it, it does not necessarily translate into higher oil consumption; quite the contrary .Today the New York Fed should trigger another permanent open market operation (POMO—in this case outright purchase of Treasury coupon) followed by another one tomorrow. After that we will have to wait until Oct. 13 for the next intervention of the NY Fed.”

Jakob said, “As we expected, Japan is not friendly to the idea of the US trying to export its unemployment through the weak dollar, and the Bank of Japan has decided to bring what was left of its interest rate (0.1%) all the way down to 0% and to embark on its own program of asset buying.” As a result, he said, “For now, Europe is left holding the hot potato, but it is also unlikely that it will accept importing the unemployment of the rest of the world when it is itself experiencing problems with its periphery. Problems with Ireland are not over yet, and then we still have Greece, Portugal, and Spain to deal with, while Central Europe is still trying to find a way to get out of the mess of its Swiss Franc loans.”

Iraq’s proved reserves up
In other news, Jakob said, “Yesterday Iraq announced the estimate of its proved reserves was increased by 28 billion bbl (24%). If currently the focus is still on the Fed and the upcoming jobs report we will not discount the potential market impact of Iraq’s announcement as it could lead some passive investors that have been sold the peak oil theory to start ask questions while they see their yearly returns on oil index investment getting eaten up by the contango roll.”

He said, “Demand for oil has been and will continue to be on a rising trend but proven oil reserves are also on a linear rising trend. Oil might be a finite resource, but the more we search, the more we find oil.” It is not, he said, “a finite resource for the lifetime of any financial investment. It is relatively easy to extrapolate oil demand, but having a correct view on proved oil reserves has always been difficult as it also depends on geopolitical openness of certain countries and of technological progress for the reserves estimate but as well for extraction. As a result, the ratio of proved reserves to oil demand has risen to a multiyear high, which means that we are the further and further away from peak oil.”

Jakob noted, “Proved reserves can not be brought online within 6 months, so there will be times of supply and demand imbalances as we move forward. But those imbalances have always existed and are part of the investment cycles both in upstream and downstream as there can never be a perfect time match in development projects. Structurally, however, it is difficult to make a strong case of global peak oil when proved oil reserves continue to rise. Iraq will be a supply force to consider as it is a country that has one the lowest cost of production (low ratio of wells to production), and if the export infrastructure is not yet perfect, it does not take that much time to build an export terminal. Iraq will not be an important supply input for the next 6 months, but the passive investors that are in the market for the next 10 years on the finite resource trade should make sure they have a proper assessment of Iraq’s potential supply.”

Energy prices
The November contract for benchmark US sweet, light crudes climbed as high as $82.38/bbl in intraday trading Oct. 4 before closing at $81.47/bbl, down 11¢ for the day on the New York Mercantile Exchange. The December contract dropped 30¢ to $82.20/bbl. On the US spot market, WTI at Cushing, Okla., was down 11¢ to $81.47/bbl, still tracking the futures price. Heating oil for November delivery declined 0.91¢ to $2.28/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 0.72¢ to $2.09/gal.

The November natural gas contract dropped 7¢ to $3.73/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 11¢ to $3.55/MMbtu.

In London, the November IPE contract for North Sea Brent crude lost 47¢ to $83.28/bbl. Gas oil for October increased $7.25 to $727/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 43¢ to $79.95/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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