MARKET WATCH: Energy prices rise as Bernanke keeps low interest rate

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 28 -- Energy prices rose Apr. 27, with crude up 1% to a 33-month high in the New York market, after US Federal Reserve Chairman Ben Bernanke said he still plans to keep interest rates low, which investors equate with a weaker US dollar.

In a first-ever press conference following a monthly meeting of Fed policymakers, Bernanke said the Fed can do nothing to lower high energy prices. Unlike President Barack Obama who has the Department of Justice searching for greedy speculators he claims are driving up energy costs, Bernanke blamed rising prices on geopolitical threats to Middle East oil supplies and growing demand from developing countries. “The Fed can’t create more oil,” he said.

However, many blame the Fed’s “quantitative easing” economic stimulus program for reducing the value of the US dollar, the currency in which world oil and other commodities are traded, thus driving up prices. Bernanke did say he plans to end the QE program after completing the current second phase.

“The new word in Fed parlance is ‘transitory,’” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Whenever something is not going your way, just say it is ‘transitory.’ Slower growth than expected, slower employment improvement than expected, higher inflation than expected? It is only transitory.”

Jakob said, “Our main take from the Fed meeting and press conference is that QE2 will end as scheduled at the end of June (not a surprise) and will not be followed by QE3, although by reinvesting its maturing assets the Fed is likely to do some sort of ‘QE Light.’ The high commodity prices are, however, starting to be a problem for the Fed, and it is starting to increase its inflation projections. For now the Fed hopes that high commodity prices just go away (transitory)…but the rise of commodities is starting to limit some of the Fed’s freedom of action.”

Jakob said, “Because the European Central Bank functions less on hope than the US Federal Reserve, it is likely that the ECB will continue to tighten ahead of the US Fed (German inflation is running at 2.6%). That is not putting an end to the fall of the dollar, although the euro is now approaching the resistance of 1.50 and above that level it does not yet have any history of sustainability. European exports will be challenged by the continued rise of the euro, and we still have to go through the episode of Greece restructuring its debt (the yields for the 2-year bonds on Greece are now over 25%).”

Bernanke’s statements again stimulated the stock market, as the QE program has done all along albeit without substantially lowering unemployment rates. It “left the broader market modestly higher,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas finished the day 1% lower on forecasts for mild weather in the Northeast this week.”

Analysts at Standard New York Securities Inc., the Standard Bank Group, said, “The impetus to energy prices was largely attributable to dollar weakness, but also increased confidence in the strength of the US economy (as evidenced by the strong pick-up in US equities).”

Also contributing was the Energy Information Administration’s weekly inventory report showing US stockpiles of gasoline fell last week to the lowest levels since August 2009. Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, reported, “Gasoline inventories have now declined more than 35 million bbl over the last 10 weeks and are now 1.4% below the 5-year average.”

With the US entering the traditional driving season, falling gasoline inventories have generated more uncertainty over energy supply, Standard Bank analysts said. “However, given that crude oil inventories saw an unexpectedly large build for the week, not much should be read into the gasoline numbers. The return of refinery capacity continued, albeit at a slower rate than expectations,” they said.

Sharma noted, “Although the moderating weather is pulling some support away from natural gas, prices remain relatively strong on robust physical markets and anticipation of below-normal storage build.

US inventories
The Energy Information Administration reported Apr. 28 the injection of 31 bcf of natural gas into US underground storage in the week ended Apr. 22, less than the consensus estimate of 37 bcf input. That increased working gas in storage to 1.7 tcf. That’s 215 bcf less than in the same period last year and 11 bcf below the 5-year average.

EIA earlier reported domestic US benchmark crude inventories jumped by 6.2 million bbl to 363.1 million bbl in the week ended Apr. 22, more than making up the previous week’s draw. Gasoline stocks continued falling, however, down 2.5 million bbl to 205.6 million bbl. Both finished gasoline and blending components were down. The decline in distillate fuel inventories was extended, down 1.8 million bbl to 146.5 million bbl in the latest week (OGJ Online, Apr. 27, 2011).

Energy prices
The June contract for benchmark US sweet, light crudes traded as high as $113.40/bbl Apr. 27 on the New York Mercantile Exchange before closing at $112.76/bbl, up 55¢ for the day. The July contract gained 57¢ to $113.76/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 55¢ to $112.76/bbl.

Heating oil for May delivery rose 2.23¢ to $3.23/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed 6.22¢ to $3.42/gal.

The May natural gas contract inched up by 1¢ to $4.38/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.8¢ to $4.35/MMbtu.

In London, the June IPE contract for North Sea Brent crude escalated 99¢ to $125.13/bbl. Gas oil for May gained $6.50 to $1,024.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 38¢ to $119.34/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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