MARKET WATCH: Energy prices continue climbing in international markets

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 6 -- Energy prices continued climbing Dec. 3 with crude hitting a 25-month high in New York as the US dollar dipped to its lowest level since Nov. 23, US payrolls increased less-than-expected in November, and the jobless rate unexpectedly rose to 9.8%.

“This prompted investors to switch from the dollar to commodities,” said analysts in the Houston office of Raymond James & Associates Inc. Higher oil prices helped drive outperformance in energy stocks, and the broader market also closed up slightly. Natural gas traded higher, with the National Weather Service predicting below-average temperatures in the eastern third of the US during Dec. 11-15.

Crude prices “have hit their 2010 peak levels,” with the January contract for North Sea Brent above the “psychologically important” $90/bbl, boosted by icy weather in northern Europe. “The $90/bbl level is important because many…believe that economic growth could start to suffer if prices rise much above this,” said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK.

They reported, “Heavy snow and freezing weather has afflicted much of northern Europe, much earlier in the heating season than usual. In the US, heating oil stocks have been plunging from their autumn peaks, and in Europe strong demand has been reported for heating oil in the main consuming regions, adding to tightness in middle distillates prompted by the recent heavy Chinese buying. Although meteorologists concur that this winter is likely to be unusually cold, there is no consensus over quite how cold it will get. Flying in the face of global-warming scenarios, Polish weather forecasters have predicted this winter will be the coldest in 1,000 years because the warming flows of the Gulf Stream have diminished. If the trend continues, they say, most of Europe will become a permafrost area.”

Meanwhile, both West Texas Intermediate and North Sea Brent crude “flipped rather decisively from contango to backwadation” last week. “Cracks of both gasoline and gasoil strengthened, while fuel oil cracks weakened,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Front-month WTI had a 6.5% net gain last week, while front-month Brent “broke above the psychologically important $90/bbl,” he reported.

“The turning point of the market was when the European Central Bank indicated at the beginning of last week they would extend their bond purchasing. The strong rally is in contrast to the mildly bearish Department of Energy inventory report on Dec. 1 and a disappointing US jobs report on Dec. 3,” Zhang reported.

However, he said, “Looking ahead, we note the European sovereign debt crisis has been delayed rather than resolved. The Chinese government is now prompting more ‘prudent’ policies rather accommodative policies. US oil demand is still subdued. The oil price has been driven predominantly by the excessive liquidity. We do not believe oil prices above $90/bbl and the recent backwardation can be sustained for long.”

Economic outlook
General macro-economic data were mixed earlier in the week, “but the trading momentum was so strong that worse-than-expected outcome was quickly ignored and anything better than expected was brought to the front stage,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The same continued Dec. 3 when the non-farm payrolls and unemployment rate coming out much worse than expected was quickly ignored by the global market as a non-significant input.”

Jakob said, “Nevertheless, we still feel that lower unemployment is necessary for economic recovery and oil demand. The nonfarm payroll only added 39,000 jobs compared to the 150,000 that were expected. The breakdown of the data is even worse as there [were losses] of 18,000 [jobs] in manufacturing [and] 28,000 in retail, while on the positive side there was an increase of 47,000 in ‘administrative and waste services,’ which is including a 40,000 increase in temporary services. Since the end of June 2009, which was the official end of the recession, private jobs have increased by 203,000—a number that includes a 460,000 increase in temporary services and a 134,000 decrease in manufacturing. What job improvement there has been since the official end of the recession has been in the extremely low-paying sector of temporary service. An economy cannot be rebuilt with job creation concentrated in the $10,000-20,000/year temporary service sector.”

Federal Reserve Chairman Ben Bernanke acknowledged Dec. 5 on CBS’ “60 Minutes” news program the US economy is still fragile and therefore Congress should neither cut spending nor boost taxes. He predicted it may take 4-5 years for unemployment, now at 9.8%, to return to its normal historic level of 5-6%.

“Unfortunately Bernanke is not able to lift the spirits in China, and the Shanghai composite is the main market that stayed downbeat last week and is down 13.26% for the year (down15.09% on the Shanghai A exchange).” Jakob reported. “There was a total of $39.5 billion of primary open market operations (POMOs) done by the US Fed last week, including some back-to-back deals of buying from primary dealers notes that were issued by the Treasury on the same day. This week there will $18.5 billion of POMO conducted.”

There is no sign the Fed’s two rounds of quantitative easing by buying back Treasuries— QE ‘Light’ and QE2—has halted outflows from equity mutual funds, “and volume on the New York Stock Exchange has not seen any improvement,” he said. “To the contrary it is continuing its declining trend. The latest data from the Fed (for the week ending Nov. 24, which basically covers the first week of QE2) shows an increase of cash in US commercial banks of $80 billion. That is too early to call a trend as the weekly data has shown some large week-to-week variation, but given that QE1 resulted more in an increase of cash in vaults than a push of money to the economy, it is a set of data that we will have to continuously monitor again. If asset prices are indeed higher than at the start of QE Light and QE2, it is for now difficult to make the claim that it is driven by liquidity hitting the markets. For now it seems that markets are driven more by fear than by facts, with volume not improving on the NYSE and outflows not stopping.”

Zhang said, “The range-bound pattern of the oil price so far this year shows that the oil market has been firmly anchored by supply and demand fundamentals. These fundamentals are weak — but improving. Our view is that oil price will stay range-bound this year. The market is under downward pressure from European sovereign debt concerns and potential further policy tightening in China. At the same time, US economic growth has shown strong momentum recently, which represents the most significant upside risk to oil.

Energy prices
The January contract for benchmark US light, sweet crudes continued climbing, up $1.19 to $89.19/bbl Dec. 3 on the New York Mercantile Exchange. The February contract rose $1.17 to $89.59/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.19 to match the front-month futures contract at $89.19/bbl. Heating oil for January delivery increased 3.28¢ to $2.49/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped by 0.32¢ to $2.35/gal.

The January natural gas contract inched up 0.6¢ to $4.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 4.1¢ to $4.27/MMbtu.

In London, the January IPE contract for Brent increased 73¢ to $91.42/bbl. Gas oil for December gained $11.25 to $761.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 99¢ to $87.13/bbl. So far this year, OPEC’s basket price has averaged $76.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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