MARKET WATCH: Energy price tumble on international economic concerns

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 17 -- Debt worries in Europe, inflation concerns in Asia, and a report US industrial production was flat in October dropped oil prices to a 2-week low and cut natural gas prices 0.7% on Nov. 16 in the New York market.

“Oil had another big down day yesterday after a slight pause on [Nov. 15],” said Leon Westgate at Standard New York Securities Inc., the Standard Bank Group. “On the macroeconomic front, US October industrial production was disappointing, coming in flat against expectations of a small rise. Inflation in the US and Euro-Zone remains subdued.”

In Houston, analysts at Raymond James & Associates Inc. said Ireland may be the next country to need a financial bailout from the European Union and the United Nations’ International Monetary Fund. “As Ireland's debt problems weighed on the euro, the dollar rallied and crude prices fell,” they said. “Energy (corporate) stocks took the cue from crude and the broader market.”

While the oil market “seems in a bit of turmoil” at the moment, Westgate said, “The fundamentals have not changed overnight. Although crude will likely look to exogenous factors over the short term, we expect that fundamentals to take a more important role going forward, once a degree of calm has been restored.”

Olivier Jakob at Petromatrix, Zug, Switzerland, expects China to announce price control measures “in the next few days.” He noted, “Next week will be a short trading week due to Thanksgiving [on Nov. 25], and repositioning and book squaring for the Chinese measures will need to be done this week rather than next due to the lack of liquidity during the week of Thanksgiving.”

Meanwhile, the US Federal Reserve Bank “wanted to push investors out of treasuries and into riskier assets” through its second round of quantitative easing (QE2). However, Jakob said, “The problem is that investors are not looking to go into riskier assets but into risk-free assets. QE2 was supposed to be that risk free trade. However, with China and Ireland [economic problems], a risk premium starts to come back and the correction of the last few days shows how little risk the market really wants to take.”

Jakob reiterated his belief oil price rallies above $85/bbl are not sustainable. In that connection, he said, “We have no evidence that China can live with oil prices close to $90/bbl, and investors are discounting too greatly the fact that China only went to internationally-linked fuel prices in the first quarter of 2009 (when oil was at $40/bbl). In April when crude first tested $87/bbl, we saw the Chinese government postponing the internal price hikes and to us that was the first sign of Chinese nervousness with the price of oil. In the current rally we see the government talking about taking additional measures to curb inflation.”

He said, “Gasoline consumption in the US started to come off in the fourth quarter of 2007 when oil prices were approaching $90/bbl. Today the price of diesel in China is higher than in the US and 36% higher than at the start of 2008. If China has to resort again to greater subsidies to bring the internal prices down, it only means that the world prices can not be sustained by the state of the economy.”

US inventories
The Energy Information Administration said commercial US inventories of crude fell 7.3 million bbl to 357.6 million bbl in the week ended Nov. 12, but stocks remained above average for this time of year. The Wall Street consensus was for no change. Gasoline stocks dropped 2.7 million bbl to 207.7 million bbl, outstripping market expectations for an 800,000 bbl decline. Both finished gasoline inventories and blending components inventories decreased. Distillate fuel inventories were down 1.1 million bbl to 158.8 million bbl, less than the anticipated 2 million bbl decline. Both gasoline and distillate stocks ended the week higher than average.

However, Westgate said, “The inventory change is likely to take a backseat role for now, as the market continues to digest the recent sell-off.”

Imports of crude into the US decreased by 225,000 b/d to 7.9 million b/d during the same week. In the 4 weeks ended Nov. 12, crude imports into the US averaged 8.5 million b/d, down 64,000 b/d from the comparable period in 2009. Gasoline imports (including both finished gasoline and gasoline blending components) averaged 562,000 b/d and distillate imports averaged 87,000 b/d last week.

Input of crude into US refineries increased by 217,000 b/d to 14.3 million b/d last week with units operating at 84% of capacity. Gasoline production decreased to 8.9 million b/d and distillate fuel production increased to 4.3 million b/d.

Energy prices
The December contract for benchmark US light, sweet crudes fell $2.52 to $82.34/bbl Nov. 16 on the New York Mercantile Exchange. The January contract dropped $2.45 to $82.84/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.52 to $82.34/bbl. Heating oil for December delivery lost 6.19¢ to $2.31/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 3.93¢ to $2.16/gal.

The December natural gas contract decreased 2.7¢ to $3.82/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 11¢ to $3.68/MMbtu.

In London, the December IPE contract for North Sea Brent crude dropped $2.03 to $84.73/bbl. Gas oil for December fell $14.75 to $724/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $1.04 to $82.36/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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