Sam Fletcher
OGJ Senior Writer
HOUSTON, Nov. 22 -- Crude oil prices dipped again Nov. 19 in the New York market after surging in the previous session on a pending European bailout of the Irish banking system, but natural gas rebounded strongly with National Weather Service's predictions for below-average temperatures to blanket the Midwest and East Coast Nov. 29-Dec. 5.
Last week as a whole, said analysts in the Houston office of Raymond James & Associates Inc., “Oil took a beating, falling 4% after China raised its bank reserve requirements for the second time in 2 weeks in order to control inflation. Separately, the European sovereign debt crisis (Part 2) hung over markets amid escalating concerns about Ireland's solvency. However, over the weekend Ireland gave in to international pressure and applied for a bailout package from the European Union and the International Monetary Fund, spurring optimism that the rescue package will prevent contagion across European debt markets.”
James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “The oil market was dominated by concerns over eurozone debt issues and China’s tightening of monetary policy last week. The huge weekly inventory draw in the US in the order of 9 million bbl was largely ignored. Net for the week, front-month West Texas Intermediate was down $3.37/bbl…and front-month Brent lost $2/bbl….”
The latest Commodity Futures Trading Commission report showed money mangers reduced net lengths by 20.8% during the week from a record high level on Nov. 9. “Swap dealers continue to accumulate shorts,” said Zhang. “Commercial hedgers are less short in total, implying fewer producers are selling and more consumers are long. It is worth noting the net short position held by the commercial hedgers was at its lowest level on record last week.”
He said, “As the eurozone debt issues settle on the back of Ireland bailout ahead of the US Thanksgiving holiday on Nov. 25, we expect the energy market to remain in consolidation mode. Further ahead, we see supply and demand fundamentals to improve at a very slow pace and market direction generally directed by excess dollar liquidity and downward risk of Chinese monetary tightening.”
Olivier Jakob at Petromatrix, Zug, Switzerland, noted US corporate stocks were flat for the week and “only a late minute rally” on Nov. 19 prevented them from finishing in the red for a second consecutive week. For now, the “real start” of the Federal Reserve Bank’s second phase of quantitative easing “with $38 billion of QE2 spent so far under that program has not done much for risk assets,” Jakob said. A permanent open market operation of $9 billion was scheduled Nov. 22 by the Fed, followed by a $2 billion POMO on Nov. 23. “After that there will be no POMO until Nov. 29, primarily due to the Thanksgiving holiday and lack of market participants [with US markets closed Nov. 25-26],” he said.
Over the last 2 weeks, Jakob said, “The weakest performance out of the main indices was coming out of China. With the fear of interest rake hikes in China to curb inflation, the Shanghai Composite Index has been a key sentiment driver over the last 10 days for global commodities and is therefore the first indicator we will be checking on our start of the trading day. It started the week marginally weaker.”
On Nov. 19, China announced an increase for the bank’s reserve ratio “and while it contributed to bring some capping pressure on commodities, the measure is not a significant as an interest rate increase.” Jakob said, “What was interesting is that a leading news provider sent out the wrong headline that China was increasing interest rates by 50 basis points. The headline was quickly corrected, but the market dropped like a rock within the 2 min before the correction was sent (and the market rebounded as quickly). That wrong headline, however, provided some price-discovery for what would be the market reaction the day China announces an increase in rates or more significant action than an increase in the bank reserve ratio.”
However, analysts at Barclays Capitol Commodities Research said, “Enough of a sequence of robust and optimistic global oil demand data has come in over an extended period that the oil market appears to us to be starting a process of adapting to some brighter conditions. In particular, there are signs of a better sense of Organization for Economic Cooperation and Development demand recovery complementing the strong growth in non-OECD oil demand, the follow-through of which has seen the rapid burning off in excess inventories. Precalamity blues are slowly on their way out, while the mood in the market is finally turning more extravagant. Persistent upward revision to oil demand expectations has drawn a picture something a bit more redolent of a tiger, with global oil demand growth set to breach 2 million b/d for only the second time in over 30 years and market conditions at their tightest in over 2 years. With the removal of the large barrels of floating inventory, the upside surprise in demand is being entirely reflected in the rapid erosion in onshore stocks. The inventory overhang in the OECD outside the US has fallen well below the 5-year average, while the drawdown in US inventories, although slow in commencing, is flourishing with full vigor.”
'Apparent sense of comfort'
As a result, the “apparent sense of comfort” of plentiful spare production capacity of the Organization of Petroleum Exporting Countries “also is slowly being challenged, with our own expectations pointing to a continued steady erosion of space capacity to around 4 million b/d by the end of next year, taking global capacity utilization back above the critical 95% level,” Barclays Capitol analysts said. “Some familiar impediments in the form of sovereign debt or deterioration in growth prospects in emerging markets still remain. But, having woken up from its long slumber, the stomping tiger seems to be in the mood to tackle these issues head-on.”
They noted, “Consensus estimates place 2011 growth somewhere in the range of 1-1.5 million b/d, beyond which we would argue that they significantly underestimate the path of oil demand. . . . What the consensus often fails to factor in is that non-OECD consumers, who are now very much at the margin of the market, have far higher income elasticity of demand than OECD consumers and a far lower threshold for energy efficiency gains. Indeed . . . to equate the peak of global gasoline demand with that of the US is incorrect. That discounts both the potential changes in gross domestic product and demographic growth in the US and perhaps more importantly in the rest of the world, in particular, the non-OECD. Together with the strength in diesel demand, the potential upside in gasoline magnifies the understatement of future global oil demand growth currently embedded in consensus forecasts.”
A at the Centre for Global Energy Studies (CGES), London, analysts agreed. “The third quarter of 2010 has seen a surge in reported global oil demand that is unprecedented in recent times,” marking the end of 10 consecutive quarters of global stock builds, they said. CGES estimates worldwide oil demand, measured as deliveries from refineries, soared by more than 3 million b/d year-on-year in that quarter, leading to a contraseasonal 1 million b/d draw in global oil inventories. But analysts cautioned that demand is measured at the refinery gate and not at the point of end use, “so what we have actually seen is a big jump in deliveries of finished products from refineries, not necessarily an equally big jump in the final consumption of those products.”
CGES analysts see little support from market fundamentals for a prolonged surge in oil prices. “The spectacular rate of oil demand growth seen in the third quarter is unlikely to persist. Once downstream inventories have been replenished, oil demand growth will return to a rate determined by actual consumption, and this continues to look subdued among the developed economies, which are still facing a very uncertain economic outlook,” they said.
CGES expects global oil demand to grow 1.3 million b/d in 2011, with OECD countries showing no growth. On the supply side, CGES expects production of liquids outside the OPEC quota system and Iraq (including biofuels and OPEC NGLs and other liquids) to rise by 1 million b/d in 2011, down from the 1.5 million b/d increase expected this year. “This should leave room for around 300,000 b/d more oil from OPEC next year,” the analysts said. “With ample spare capacity throughout the oil supply chain, there should be no upward pressure on oil prices from market fundamentals—as long as the available capacity is used in a timely fashion.”
CGES noted Iraq plans to add 1 million b/d of new capacity by the end of 2011 and will be pressured to utilize that capacity if available.
Meanwhile, Raymond James analysts project a 2% production decline in 2011 for Venezuela’s state-run Petroleos de Venezuela SA, with “flattish” production thereafter. “PDVSA’s production targets of 5 million b/d by 2015 and 6.5 million b/d by 2020 are good for comic relief, but nothing else in our view,” they said. “It would take a policy shift of drastic proportions to turn around PDVSA, and under [President Hugo] Chavez that just ain't happening. From a big picture standpoint, production declines in Venezuela put further downward pressure on OPEC's already limited excess production capacity, which is a key element of our structurally bullish long-term stance on oil.”
They said, “Venezuela's 40% oil production decline since 2000 (nearly the world's worst track record) is a story of politically motivated mismanagement on a grand scale. Chavez, in power since 1998, is poised to win reelection in 2012, and with term limits abolished there is no end in sight to his virulently anti-business energy policy.”
Energy prices
The December contract for benchmark US light, sweet crudes dropped 34¢ to $81.51/bbl Nov. 19 on the New York Mercantile Exchange. The January contract fell 44¢ to $81.98/bbl. On the US spot market, WTI at Cushing, Okla., was down 34¢ to $81.51/bbl, in lockstep with the front-month futures contract. Heating oil for December delivery declined 2.07¢ to $2.27/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 3.23¢ to $2.20/gal.
The December natural gas contract shot up 15.7¢ to $4.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $3.80/MMbtu.
In London, the January IPE contract for North Sea Brent crude diminished 71¢ to $84.34/bbl. Gas oil for December lost $10 to $705.50/tonne.
The average price for OPEC’s basket of 12 reference crudes gained 32¢ to $81.41/bbl. So far this year, OPEC’s basket price has averaged $76.19/bbl.
Contact Sam Fletcher at [email protected].
