MARKET WATCH: Crude oil hits highest closing price since early April

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 5 -- The price of December crude jumped 2.1% Nov. 4 to the highest level for a New York front-month contract since Apr. 6 as the market continued its reaction to the Federal Reserve Bank’s decision to buy $600 billion of Treasuries over the next 8 months to stimulate the US economy.

It was the fourth consecutive price hike for crude this week. The December natural gas contract increased 0.5%, regaining most of its loss from the previous session.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Apparently, the market needed some time to make up its mind about the Fed's latest round of quantitative easing (QE2). After posting modest gains [on Nov. 3], the broader market screamed higher yesterday with the Standard & Poor’s 500 Index (up 1.9%) reaching levels not seen since 2008.” They said energy corporate stocks “took the cue from crude,” outperforming the broader market.

The Fed’s monetary stimulus plan furthered weakened the US dollar, which fell 0.4% against the euro to the lowest level since Jan. 20, encouraging investors to shift their money to the riskier commodities of oil and gold. Gold prices surged 2.5%, the biggest 1-day jump in nearly 6 months.

“We don’t see crude decoupling from the currency markets in the near future as the reactions about the US’s looser monetary policy will keep this pot boiling,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The Fed also kept the benchmark funds rate unchanged at 0.25% as economic recovery remains disappointing slow.”

The dollar exchange rate and equity market trends “are working in favor of even higher oil prices,” said Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC. However, he said, “We would be more convinced of the sustainability of the oil price rally if it were accompanied by an elimination in contango in the crude oil forward curve and improvements in fundamentals.”

Sieminski said, “The recovery in middle distillates demand growth has been more robust relative to other fuels.” Demand growth among nonmembers of the Organization for Economic Cooperation and Development—specifically Asian countries—continues to outpace the developed world. “In our view, these two features of the market will persist, which has implications for supply-demand balances from a seasonal perspective as well as price trends,” he said.

Meanwhile, Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, “We believe that the Commodity Futures Trading Commission data released later today is likely to show that noncommercial long positions have increased from already high levels last week.” The weekly CFTC report last week showed net speculative length in crude pushed higher last week, while net speculative length in oil products declined.

De Wet said, “The current level of the speculative length in oil could cause oil prices to pull back very sharply despite the Fed’s QE2 program. To highlight the risk of such a correction, there were two previous big drops in oil prices when net speculative length had reached current levels. One was in January-February, another was April-May. We believe that commodity markets are pricing in QE2 already, and commodities will not necessarily continue to rally. We need new data to support higher prices.”

The biggest immediate threat to the current commodity price rally is “another round of tightening in monetary policy in China,” he said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “We continue to believe that QE2 is better played in equities than in oil futures. Oil prices are already back to the end 2007 levels, but the oil fundamentals are nowhere near those of 2007, and we continue to expect that higher commodity prices will be met with increasing hectic reactions from the CFTC (never mind that it is the Fed fueling the commodity price hike).”

In its just-published medium-term outlook for crude, the Organization of Petroleum Exporting Countries assumes oil prices will stay at $75-85/bbl until 2020. “They have a Call-On-OPEC for 2014 at 30.4 million b/d, i.e. only 1.2 million b/d higher than the current production and 1.6 million b/d less than the 2007 Call-On-OPEC,” Jakob noted. “It is easy to discount anything that comes out of OPEC, but we need to keep in mind that the International Energy Agency also is not calling for an increase in the Call-on-OPEC for next year. In the meantime, unresolved unemployment and rising oil prices are not a positive for oil demand, and it is at those price levels that US oil demand started to get hit at the end of 2007.”

Energy prices
The December contract for benchmark US light, sweet crudes traded at $84.92-86.83/bbl Nov. 4 before closing at $86.49/bbl, up $1.80 for the day on the New York Mercantile Exchange. The January contract climbed $1.81 to $87.16/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.80 to $86.49/bbl, once more in lockstep with the front-month futures price. Heating oil for December delivery gained 4.52¢ to $2.33/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.91¢ to $2.18/gal.

The December natural gas contract recovered 2¢ to $3.86/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 13.9¢ to $3.51/MMbtu. Meanwhile, the Energy Information Administration reported the injection of 67 bcf of natural gas into US underground storage in the week ended Oct. 29. That put working gas in storage above 3.8 tcf—up 37 bcf from the comparable period last year and 353 bcf above the 5-year average (OGJ Online, Nov. 4, 2010). “Weak supply and demand balances suggest excess storage will persist across the winter,” Sieminski said.

In London, the December IPE contract for North Sea Brent crude was up $1.62 to $88/bbl. Gas oil for November gained $15.25 to $737.50/tonne.

The average price for OPEC’s basket of 12 reference crudes rose $1.77 to $84.33/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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