MARKET WATCH: Weakening dollar raises crude prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 19 -- The euro strengthened, the dollar weakened, and crude jumped 1.8% on Nov. 18, recovering much of its losses from the previous session in the New York market, as the Irish government agreed to accept an international bailout of its banking system from the European Union and the International Monetary Fund.

“After Ireland declared that it would receive an EU-led bailout, the Standard & Poor’s 500 index and the Dow Jones Industrial Average both rose 1.5%,” said analysts in the Houston office of Raymond James & Associates Inc. “In light of the market and crude rallies, energy stocks outperformed the broader markets.”

However, they said, “Natural gas fell for the first time in 3 days despite a smaller than expected [US storage] build, down 0.6% as cooler-than-expected weather is expected to temper demand.” They reported crude down 0.7% and gas up slightly in early trading Nov. 19.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Product cracks and refinery margins moved higher, with it appearing that refineries are delaying any ramp-up in refinery runs. This is likely to be short-lived, however, as we are at the end of the turnaround season.” Time spreads strengthened slightly; so did physical differentials to benchmark crude, he said.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Crude was also supported by the improvement in economic outlook over the next 3-6 months as the index of US leading indicators increased by 0.5% in October, the fourth consecutive increase. Although the improving economic outlook and the recent inventory draws can fundamentally support the current price level, the tepid growth in the Organization for Economic Cooperation and Development regions will limit any sharp appreciation in prices until the major economies start firing on all cylinders.”

On Nov. 18, the OECD cut its global growth forecast for 2011 from 4.5% to 4.2%, citing the fading away of the stimulus spending next year.

On the macroeconomic front, Zhang observed, “The US weekly jobless claim number was broadly aligned with the consensus, though the Philadelphia Fed Business Outlook Survey came out better than expected, which may alleviate some concerns over the US economy.”

Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC, said, “The past week has seen commodity index returns almost entirely wipe out the gains that followed quantitative easing measures from the Federal Reserve Bank. We expect Ireland will apply for European Financial Stability Facility aid over the next few days, and this will help to stabilize financial markets and commodity index returns.”

Sieminski noted, “Oil's run to nearly $90/bbl was stopped in its tracks last week with China growth worries and European sovereign debt fears providing the bearish catalyst. We expect strong non-OPEC supply growth into 2011 will add to these concerns.”

He said, “China's refining industry faces challenges going into the next year in an environment of increased controls on retail fuel prices as a policy tool to curb inflation. Coupled with a sustained higher oil price trend, this could impact China's domestic refining margins materially and therefore refinery run rates.”

With no additional macroeconomic data to watch for Nov. 19, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The highlight of the day will be [Federal Reserve Chairman Ben] Bernanke blaming it all on the Chinese in his speech to the European Central Bank conference [in Frankfurt].” The Fed’s latest permanent open market operation “will also be minuscule at about $2 billion,” he said. Jakob warned, “The S&P 500 is not yet out of its descending channel and will have therefore to confirm the rebound of yesterday with a higher close today.”

Zhang said, “It’s reasonable to assume that no significant risk-on trade activity will emerge prior to the Thanksgiving holiday in the US next week. In addition, the market is still concerned over Chinese monetary policy moves. Any Chinese interest rate increase before the Thanksgiving holiday may, however, prompt a further sell-off. It is worth noting that the Commodity Futures Trading Commission net speculative length 2 weeks ago was higher than that in May, while the trading volume since [Nov. 12], when the market plunged, has been much lower than that during the period of sell-off in May. Therefore, plenty of selling potential still remains. On balance, however, should China hold back on any rate increase, the market is likely to move sideways.”

Energy prices
The December contract for benchmark US light, sweet crudes escalated $1.41 to $81.85/bbl Nov. 18 on the New York Mercantile Exchange. The January contract climbed $1.38 to $82.42/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.41 to $81.85/bbl. Heating oil for December delivery increased 4.32¢ to $2.30/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 7.04¢ to $2.23/gal.

The December natural gas contract dropped 2.3¢ to $4.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 3¢ to $3.80/MMbtu. Sieminski said, “One factor helping maintain strong natural gas production is the substantial cash flow gas producers are generating from NGL production and high fractionation spreads. We may be getting closer to an NGL glut that squeezes those spreads, but spreads have been getting better, not worse.”

In London, the January IPE contract for North Sea Brent crude rose $1.77 to $85.05/bbl. Gas oil for December dropped $2 to $715.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 81¢ to $81.09/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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