MARKET WATCH: Crude oil hits 2-year high in intraday trading

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 8 -- The front-month crude oil contract continued climbing Nov. 5 for the fifth consecutive session, hitting a 2-year intraday high of $87.43/bbl at one point before closing a little below $87/bbl in the New York market amid concerns of a protracted period of weakness in the US dollar and risks of inflation.

“The much-heralded decision by the US Federal Reserve to print billions of dollars to help boost the economy, a second round of quantitative easing dubbed by the market as QE2, also helped support oil prices. Indeed, oil prices have risen by more than 15% since the market got wind [last week that the Federal Reserve Bank planned to] buy $600 billion in Treasuries,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC in Surrey, UK. As a result, they said, “The bulls are once again in the ascendant, and it looks very likely that $90/bbl will be tested within days, although US benchmark West Texas Intermediate still trails North Sea Brent at around $1.50/bbl discount and so may take longer. The US decision, however, risks upping the ante at the [Nov. 11 meeting of the] Group of 20 (G20).”

They noted, “Finance ministers led by the US have been seeking to stop competitive exchange rate devaluations, but it’s difficult to see QE2 as anything but this. Brazil’s finance minister will complain about the Fed’s decision at the upcoming G20 meeting, saying it could aggravate imbalances in the global economy. China, Thailand, and Mexico have all spoken out against QE2, and Beijing spoke of ‘deep bitterness’ about the dollar weakness.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The US equity markets made strong gains in the first days of QE2. The Standard & Poor’s 500 Index was up 3.60% on the week and is now up 9.93% for the year while the NASDAQ was 2.85% higher in the week and is now up 13.65% for the year.”

Jakob said, “The amount of the QE2 was not really a surprise. What was probably more of a surprise was that the Fed is happy to be seen as the official ‘plunge protection team.’ If as expected Republican Ron Paul takes in January the leadership of the subcommittee on domestic monetary policy, it will make for some interesting grilling on Capitol Hill as this is a man that published a book called ‘End the Fed’ and has pushed in the past for an audit of the decision-making at the Federal Open Market Committee [the policy-making arm of the Fed].”

He said, “While QE2 has made selling the dollar a favorite trade, the old European continent continues to suffer from its toxic peripheries and might be starting to show signs of the challenge of maintaining growth while the euro is being bid up.” Data showed foreign orders to German factories are down compared with August “on a slowdown of orders from other European countries but as well from non-European countries,” Jakob said.

“We remember the discussions about quantitative easing back in early 2009 when the Fed was launching QE1 and the risk that some saw for runaway inflation, the need to hedge against inflation, etc.,” he said. “In the end QE1 did not create any core inflation because the money stayed in cash at the banks rather than thrown back into the economy, and it will be interesting to follow the evolution of cash held by banks in the weeks to come to see if QE2 is not a troubled asset relief program (TARP) in disguise.”

Jakob said, “When QE1 was launched, oil prices were at $40/bbl. Oil prices have doubled since then and then the economy started to stall and the expected job creation never came. QE2 is launched with oil prices at $85/bbl, and if the new Fed liquidity is pushed into oil futures then the impact on the economy will be quick but not positive as we are starting QE2 with oil prices at too high of a base. [Fed Chairman Ben] Bernanke stated that he is not worried about higher commodity prices translating into high inflation; that might be true for the measurement of core inflation by the Fed, but it does translate into lower disposable income and especially so for emerging countries.”

Meanwhile, the US government reported nonfarm payroll added 151,000 jobs in October while September was revised higher. “Overall these were better than expected numbers but at the 2010 rate of job additions it will take 6 years to reverse the losses of 2008-09,” Jakob said. However, there was no increase to jobs in manufacturing, where employment has been basically unchanged since May.

Pending home sales for September were down compared with August, and the overall index remains near the historical bottom.

Energy prices
The December contract for benchmark US light, sweet crudes increased 36¢ to $86.85/bbl on the New York Mercantile Exchange. The January contract advanced 32¢ to $87.48/bbl. On the US spot market, WTI at Cushing, Okla., was up 36¢ to $86.85/bbl. Heating oil for December delivery gained 1.17¢ to $2.38/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.29¢ to $2.18/bbl.

The December natural gas contract continued to advance, up 8.1¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.4¢ to $3.51/MMbtu.

In London, the December IPE contract for Brent crude increased 11¢ to $88.11/bbl. Gas oil for November lost $2.25 to $735.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was unchanged at $84.33/bbl. So far this year, OPEC’s basket price has averaged $75.86/bbl, up from $61.06 for all of 2009.

Contact Sam Fletcher at samf@ogjonline.com.

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