MARKET WATCH: Prices fall as Fed warns of slow recovery

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 15 -- Energy prices continued to see-saw this week with crude futures down Dec. 14 in the New York market as the dollar strengthened and the Federal Open Market Committee, the policy-making arm of the Federal Reserve Bank, reported financial recovery is still too slow and reiterated its bond-buying plan to stimulate the economy.

However, cold weather in the US and Europe buoyed heating oil prices, limiting losses on crude.

“Natural gas markets were deflated on a warmer run of forecasts for the end of December. Persistent cold has been the market's sole support of late, and the suggestion that blocking could weaken and change the current temperature pattern took prices steeply lower,” said analysts at Barclays Capital Commodities Research. “If weather shifts back to normal, the market focus will turn back to high and rising supply—the one factor that has not changed and that should keep pressure on prices. Cash prices fell in most locations but remained well supported in the Northeast,” they said.

“The broader [equities] market ended the day relatively flat after Fed comments highlighted concerns for high unemployment, causing the market to retrace most of its early gains from a positive retail sales report,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude fell 0.4% as the dollar strengthened, while natural gas fell a whopping 3.9% on forecasts of moderate temperatures.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported oil remained in a consolidation mode. “Product cracks weakened as the American Petroleum Institute reported builds in gasoline and distillate inventory. Meanwhile, the term structure of West Texas Intermediate collapsed further.”

Olivier Jakob at Petromatrix, Zug, Switzerland, noted US retail sales—exempting autos and gasoline—in November were strong, up 0.8% from the previous month and up 6.3% from November 2009, continuing the trend from September and October.

“That did not prevent the Standard & Poor’s 500 index from ending again almost fully flat on the day as the focus of global markets is currently on the Treasury yields,” Jakob said. “Treasuries continued to be sold (i.e. yields increasing). This in turn is [causing] the mortgage rates to rebound with the 15-year fixed mortgage gaining close to 1% over the last 2 months and basically back to the levels seen in the first quarter of the year. If the US ‘tax cuts’ erased some uncertainty, they are not really a positive income for the consumer given that they are a rollover from current levels.”

On the other hand, he said, since the start of the second phase of the Fed's quantitative easing program (QE2) the US consumer is facing higher costs for fuels and higher mortgage rates. “If QE2 has managed a stock market rally, it has done little overall for disposable income,” said Jakob.

US inventories
The Energy Information Administration said Dec. 15 commercial US crude inventories fell 9.9 million bbl to 346 million bbl in the week ended Dec. 10. That surpassed the Wall Street consensus for 2.5 million bbl decrease. Gasoline stocks were up 800,000 bbl to 214.8 million bbl, well short of market expectations of a 2 million bbl increase. Finished gasoline inventories decreased while blending components inventories increased. Distillate fuel inventories gained 1.1 million bbl to 161.3 million bbl; the market had expected no change.

API earlier reported a 1.4 million bbl draw on US crude stocks, a 2.4 million bbl increase in gasoline inventories, and a 2 million bbl build in distillate stocks.

EIA said imports of crude into the US dropped 1.4 million b/d to 7.7 million b/d in that same week. For the four weeks through Dec. 10, imports averaged 8.6 million b/d, up by 238,000 b/d from the comparable 4-week period last year.

The input of crude into US refineries increased 71,000 b/d to 15 million b/d with units operating at 88% of capacity. Gasoline production decreased to 9.3 million b/d while distillate fuel production increased to 4.5 million b/d, said EIA.

Energy prices
The January contract for benchmark US light, sweet crudes fell 33¢ to $88.28/bbl Dec. 14 on the New York Mercantile Exchange. The February contract dropped 30¢ to $88.84/bbl. On the US spot market, WTI at Cushing, Okla., kept pace with the front-month futures price, down 33¢ to $88.28/bbl. Heating oil for January delivery inched up 0.27¢ but closed essentially unchanged at a rounded price of $2.47/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.2¢ to $2.30/gal.

The January natural gas contract lost 16.5¢ to $4.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 11.5¢ to $4.31/MMbtu.

In London, the January IPE contract for North Sea Brent crude gained 2¢ to $91.21/bbl. Gas oil for January lost $1.75 to $765.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 25¢ to $88.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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