MARKET WATCH: Weaker dollar deletes crude oil price gain

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 7 -- Crude oil prices fell Jan. 6, wiping out gains from the previous session in the New York market as the euro fell to more than a month’s low against the US dollar, with the currency bottoming under $1.30 at one point in intraday trading.

“Crude fell 2.2% on the day in response to weaker equity markets and a stronger dollar while natural gas also dropped 1% as concerns of cooler-than-expected weather towards the end of the month were likely overly optimistic,” said analysts in the Houston office of Raymond James & Associates Inc. Energy stocks underperformed the broader equities market, “which mainly traded sideways and ended the day down 0.2%,” they said. Oil prices were up slightly in early trading Jan. 7 but natural gas continued to fall.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported the price spread between West Texas Intermediate and North Sea Brent crude widened to $6.14/bbl in Brent’s favor. Gasoline and heating oil cracks strengthened further.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “The combination of a very weak euro and a very strong Brent premium to WTI maintains the price of Brent on a euro/bbl basis at the highest level since April 2008 when WTI was trading at $115/bbl.”

The Jan. 6 sell-off “appeared to be in response to the recent currency moves,” Zhang said. The dollar index jumped 1% on Jan. 5 “amid signs of a strengthening labor market and continuing woes in Europe (Germany excepted)” and then increased another 0.6% Jan. 6. “In the meantime, the euro has come under heavy pressure during the last 2 days, down 1.2% and 1%, respectively,” he said. Market performance of government bonds for Portugal, Spain, and Belgium indicated “confidence towards the more peripheral eurozone countries and their sovereign debt issues remains fragile,” according to Zhang.

Meanwhile, Jakob said, “Financial markets (speculators, investment banks, pension funds) but also the Organization of Petroleum Exporting Countries are making…the same mistake [as] in 2008 and that is to believe that the world can happily live with oil at $100/bbl.” However, he said, “The warning signs that are starting to come from the protests in emerging markets should not be ignored as they are a repeat of the 2008 patterns. Current food inflation in emerging countries is very significant and when fuel inflation is added to it, then domestic unrest starts to develop. The policies of the US Federal Reserve are already very controversial and if food price riots start to become a recurring pattern, we expect the US Fed will come under even more pressure to limit its policy of wealth creation through the inflation of risk assets (including commodities).”

Jakob noted, “On Dec. 27, Bolivia increased the price of fuels (up 83%); on Jan. 1 it reversed the decision after street protests. On Jan. 1, Pakistan increased the domestic price of fuels; on Jan. 6, it reversed the decision for fear of street protests. Meanwhile, riots have started in different cities of Algeria over the price of food. India needs to increase domestic fuel prices but does not dare to do it as food inflation is already at more than 18%. Oil prices approached $100/bbl at the end of 2007 and were followed by food price riots in the first half of 2008. Oil prices approached $100/bbl at the end of 2010 and are starting to be followed by food price riots.”

He said, “The dollar index was up strongly yesterday, but that was mainly due to the euro falling hard on continued worries about the peripheries (the dollar to Swiss franc and to the yen was basically unchanged yesterday).”

Energy prices
The February contract for benchmark US light, sweet crudes dropped $1.92 to $88.38/bbl Jan. 7 on the New York Mercantile Exchange. The March contract lost $1.67 to $89.75/bbl.

On the US spot market, WTI at Cushing, Okla., was down $1.92 to $88.38/bbl. Heating oil for February delivery declined 3.1¢ to $2.51/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.21¢ to $2.44/gal.

Natural gas prices continued to fall with the January natural gas contract down 3.9¢ to $4.43/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., slipped by 2.9¢ to $4.49/MMbtu.

In London, the February IPE contract for North Sea Brent crude declined 98¢ to $94.52/bbl. Gas oil for January dropped $2.25 to $775.25/tonne.

OPEC’s Vienna office was closed Jan. 6-7, with no price updates of its basket of 12 reference crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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