Weaker payroll data lower oil prices

Sam Fletcher
OGJ Senior Writer

Energy prices fell Feb. 4 with North Sea Brent dropping below $100/bbl in London and West Texas Intermediate down to less than $90/bbl in New York, partly in response to weaker-than-expected US payroll data.

The US Department of Labor reported an increase of just 50,000 payrolls during January vs. expectations of a 150,000 gain. Yet US unemployment dropped to 9% in January from 9.5%. Improvement in unemployment had less to do with the number of people returning to work than shrinkage of the workforce to a new low as 162,000 more people gave up looking for nonexistent jobs, lowering the unemployment rate by default.

Government officials—and some analysts—blamed the lower payroll data on snowstorms in the Midwest and Eastern US that reduced employment in construction and transportation as well as forcing many businesses to close. However, Olivier Jakob at Petromatrix in Zug, Switzerland, noted, “It does usually snow in January, and that is why the numbers are seasonally adjusted. It has snowed also in February, so we already know what will be the excuse [for] any worse-than-expected numbers next month.”

Even if there had been no bad weather, he said, “The growth in jobs would not have been strong enough to start offsetting the losses of 2008-09. Those are still years away, and even the US Federal Reserve System has given up hoping for full employment to return before many years.”

Jakob reiterated the two multibillion-dollar phases of the Fed’s “quantitative easing” program to stimulate the economy are “not doing much for unemployment but, boy, is it good for the US stock market.” Federal Reserve Chairman Ben Bernanke is no longer “even trying to pretend that the only merit of QE2 is the lift to the Standard & Poor’s 500 index and continued support (buy the dip) it provides to the equity market,” Jakob said.

A growing number of critics claim the Fed’s policies are setting the stage for severe inflation without much reducing unemployment. But optimists argue most indicators suggest the economic recovery is gaining strength and eventually will be reflected by increased employment. Meanwhile, both sides caution high energy prices could wreck worldwide recovery.

Mysterious Egypt
Another factor behind the Feb. 4 sell-off of energy contracts was because it was a Friday, and traders were repositioning themselves in case Egyptian President Hosni Mubarak was ousted over the weekend, thus reducing a possible geopolitical threat to world oil supplies.

On Jan. 31, Brent crude closed above $100/bbl for the first time in more than 2 years as pictures of civil demonstrations in Egypt filled newspapers and TV newscasts amid speculation of possible disruption of the Suez Canal. Some said the move to oust Egypt’s repressive government added a geopolitical premium of $5/bbl to the price of oil. Jakob pointed out Brent was already trading at $99.20/bbl and trying to break $100/bbl barrier before dissidents unexpectedly took to Cairo streets, so the real premium was at most $1-2/bbl. As for any danger to the Suez Canal or the Suez-Mediterranean Pipeline, he said, “The protesters in Egypt are fighting for the removal of an aging ruler, not for the destruction of their country.”

By Feb. 7, the turmoil appeared to have quieted after officials from the Mubarak administration began negotiations over the weekend with some of the demonstrators in an attempt to delay Mubarak’s departure until elections later this year.

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “The army, which to date has appeared to side more with the protesters rather than the government and its supporters, has secured the Suez Canal area and is ready to act if the turmoil threatens oil and energy infrastructure. So we are likely to see prices revert lower…when the political temperature reduces, particularly given the recent murmurings from the Organization of Petroleum Exporting Countries hinting at more ‘flexibility’ in the face of the latest rally.”

(Online Feb. 7, 2011; author’s e-mail: samf@ogjonline.com)

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