MARKET WATCH: Fed's QE2 fails to stimulate markets

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 16 -- Crude oil prices for December and January slipped a few cents lower Nov. 15 in New York and the broader equity markets remained relatively flat as concerns continued to build over the US Federal Reserve Bank’s second round of quantitative easing (QE2).

Oil briefly recovered from the Nov. 12 sell-off on Nov. 15, but “most of gains were given back by end of the day as concerns over the Irish debt situation triggered a further bout of liquidation,” said Leon Westgate at Standard New York Securities Inc., the Standard Bank Group.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “The Federal Reserve Bank of New York’s general economic index fell to 11.1 in November from 15.7 in October, signaling that the manufacturing in the New York region actually contracted for the first time in more than a year. Economists were expecting that the index would fall to just 14 in November.”

Sharma said, “Retail sales, which grew by 1.2% vs. consensus of a 0.7 % increase, were the sliver lining in Nov. 15 economic data. The ominous signs of contraction in manufacturing could keep prices under pressure as manufacturing has been the backbone of recovery so far this year. However, prices will continue to be dominated by the European debt-crisis driven events, which continue to play out in the currency markets as Ireland and Portugal struggle to put their finances in order.”

Analysts in the Houston office of Raymond James & Associates Inc said, “Economic uncertainty isn't just a concern here in the US.” They noted, “Additional action was taken by Asian governments to cool growth…. [O]n the other end of the spectrum, speculation of European debt issues is beginning to reemerge. Mixed economic data points abound, as the broader market looks to hold onto its gains over the past 2 months.”

However, Raymond James analysts said the price of natural gas climbed 1.1% to recover some of its losses from Nov. 12 on forecasts of cooler temperatures toward the end of November. Crude prices were still down and gas was fairly mixed in early trading Nov. 16.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The wealth creation dreamed up by [Federal Reserve Chairman Ben] Bernanke is nowhere to be seen, and it is all the fault of the Irish and the Chinese. Ireland is dragging its feet to accept the European bail-out and that continues to pressure the euro to the downside.”

Jakob said, “Many hedge funds had hoped that QE2 would translate into a collapse of the dollar, but the euro is proving once again that it is not a safe haven. The Chinese meanwhile continue to be worried about the very strong inflation in commodity prices. Overnight the Chinese stock market was again sharply down on fears of upcoming state intervention to control commodity inflation.”

Meanwhile, money managers pushed their net length in crude futures to the highest level this year, the Commodity Futures Trading Commission reported Nov. 9, a week after the Fed announced QE2. “However, producers have been reluctant to hedge their production. The net short position held by the large commercial players, remains well below the levels seen earlier this year, although it had been gradually increasing in recent weeks,” said Westgate.

He said, “While economic uncertainty in the middle of this year saw producers take the opportunity presented by previous rally in May to hedge, thereby increasing their net short position, the latest rally has not had the same impact. Although the flat price has reached a similar level to the recent highs in May, the net short position is much smaller, as producers appear to be holding out for even higher prices over the coming months.”

Money managers (predominantly long-only speculative investment) and swap dealers (mainly large investment banks who act on behalf of their clients) took opposite positions in the market, with money managers long on crude in the New York market and swap dealers short. “This represents the widest divergence between the two groups of market participants seen so far this year,” said Westgate. “It is also worth noting that the swap dealers had generally been long up until end of October.”

Apparently battle lines are being drawn. “At the moment, both sides seem to be in a stalemate, however, with the absence of producers in the market and that link to the underlying market, the price action over the coming months may be particularly volatile indeed,” Westgate said.

On the supply side, production was suspended at ExxonMobil Corp.’s 100,000 b/d Oso field in Nigeria due to kidnapping activity by rebels. “Attacks on oil installations were also reported in Kenya. “The supply disruptions have so far had limited impact on prices thanks to high inventories, with exogenous factors continuing to dominate price behavior,” said Westgate.

Sharma reported a maintenance-related temporary shut-in of 500 Mcfd of gas at the Independence Hub in the Gulf of Mexico. He said, “Production was shut-in over the weekend but is expected to come back to the normal level by Nov. 17.”

Energy prices
The December contract for benchmark US light, sweet crudes dipped 2¢ to $84.86/bbl Nov. 15 on the New York Mercantile Exchange. The January contract lost 5¢ to $85.29/bbl. On the US spot market, WTI at Cushing, Okla., was down 2¢ to $84.86/bbl. Heating oil for December delivery increased 0.77¢ to $2.37/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dropped 1.49¢ to $2.20/gal.

The December natural gas contract gained 4.6¢ to $3.85/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., closed at $3.57/MMbtu, down from $3.75/MMbtu on Nov. 11, the last available date.

In London, the December IPE contract for North Sea Brent crude climbed 36¢ to $86.70/bbl. The new front-month December contract for gas oil dropped $3.50 to $738.75/tonne.

The Organization of Petroleum Exporting Countries' Vienna office was closed Nov. 16, so there was no price update for its basket of 12 reference crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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