OGJ Senior Writer
HOUSTON, Oct. 20 -- The front-month crude oil contract fell 4.3% to below $80/bbl Oct. 19 in what was both the largest 1-day dollar and percentage decreases in the New York market since February, as China—the world’s biggest oil consumer—raised interest rates to rein in its rapidly growing economy.
“The broader markets got the message, with the Standard & Poor’s index falling 1.6% and the Dow Jones Industrial Average down 165 points,” said analysts in the Houston office of Raymond James & Associates Inc. “With the backdrop of declining equities, falling crude prices, and $3.50/Mcf gas, there was little hope for any energy stocks.”
Natural gas was still climbing in early trading Oct. 20 while crude was trying to regain some of its loss.
“Yesterday all the risk factors converged: the day started with overall pressure on equities…, the Chinese increase in rates forced the dollar higher with the known consequence linked to the correlations, and finally the news that the New York Federal Reserve Bank and a few large institutions were attacking Bank of America over mortgages pullbacks reminded everyone that all is not yet clear in the mortgages foreclosure crisis. The large speculators are holding record length in West Texas Intermediate and when and if they want to reduce their exposure, they have to do it in a vacuum,” said Olivier Jakob at Petromatrix, Zug, Switzerland.
Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, reported, “The dollar surged 1.5% against the euro yesterday while Chinese central bank raised its benchmark rate by 25 basis points and tightened its monetary policy, lifting its 1-year lending rate to 5.56% from 5.31%.”
Sharma said, “We believe that prices have now have pulled back to a more fundamentally sound level due to the loose supply-demand situation; however, currency markets will continue to dictate crude’s direction in the near term while the major economies tune up their monetary policies.”
The price of gas advanced in the futures market as “meteorologists changed their minds about the weather outlook,” Sharma said, adding, “Temperatures are now expected to drop below normal in the Midwest and the Southeast towards the end of the month.”
Gas prices fell Oct. 18 “after the weather models showed that the benign weather would continue across the country over the next 2 weeks,” he said. “Prices also found support from bargain hunting yesterday. However, the sentiments remain somber in the natural gas complex as the National Oceanic and Atmospheric Administration has forecast that this winter would be 3% warmer than the last winter, which was 2% colder than normal (based on the gas-home customer weighted heating degree days).”
At Standard New York Securities Inc., the Standard Bank Group, Walter de Wet said, “The oil market took a big knock yesterday.” However, he added, “Given the lagging effect of the interest rate, these increases are unlikely to have much immediate effect on the economy or energy demand. Nevertheless, all oil front-month future contracts fell by more than 4% on the day. We believe that this signals an oil market that is lacking the support of supply and demand fundamentals. The development yesterday was in stark contrast to that on [Oct. 18] when the oil market simply brushed aside the negative US September industrial production index, the first decline since the US recession ended in June 2009. Our research shows a strong correlation between oil demand and industrial production, as one would expect.”
The Energy Information Administration said Oct. 20 commercial inventories of US crudes increased by 700,000 bbl to 361.2 million bbl in the week ended Oct. 15, less than half of the Wall Street consensus for a 1.5 million bbl gain. Gasoline stocks grew 1.2 million bbl to 219.3 bbl, opposite market expectations for a 1.5 million bbl drop. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories fell 2.2 million bbl to 170.1 million bbl, surpassing Wall Street’s expectations for a 1 million bbl loss.
Imports of crude into the US increased by 472,000 b/d to 8.6 million b/d last week. Total gasoline imports averaged 779,000 b/d; distillate fuel imports averaged 140,000 b/d. In the 4 weeks ended Oct. 15, crude imports averaged 8.7 million b/d, 350,000 b/d less than in the comparable 4-week period in 2009.
The input of crude into US refineries inched up just 47,000 b/d to 14 million b/d in the week ended Oct. 15, with units operating at 82.5% of capacity. Gasoline production increased to 9 million b/d while distillate fuel production remained virtually unchanged at 4.2 million b/d.
The November contract for benchmark US light, sweet crudes dropped $3.59 to $79.49/bbl Oct. 19 on the New York Mercantile Exchange. The December contract fell $3.64 to $80.16/bbl.
On the US spot market, WTI at Cushing, Okla., was down $3.59 to $79.49/bbl. Heating oil for November delivery decreased 8.68¢ to $2.19/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 10.32¢ to $2.05/gal.
The November natural gas contract gained 8.2¢ to $3.51/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2.5¢ to $3.40/MMbtu.
In London, the December IPE contract for North Sea Brent crude lost $3.27 to $81.10/bbl, still at a premium to WTI. Gas oil for November dropped $11.25 to $704/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 27¢ to $79.30/bbl.
Contact Sam Fletcher at firstname.lastname@example.org.
MARKET WATCH: Crude oil futures price tumbles below $80/bbl