MARKET WATCH: Crude oil prices hit 6-week highs

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 25 -- Energy prices generally increased July 22 with both West Texas Intermediate and North Sea Brent up 1% to 6-week highs as the markets’ risk appetite improved following the second bail-out plan for Greece in as many years and the decision of the International Energy Agency not to release more oil from emergency reserves.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The term structures for Brent strengthened on news of further delays in underlying Brent physical cargoes.” Net for last week, front-month contracts gained $2.61/bbl for WTI and $1.41/bbl for Brent, boosted by a stronger euro.

“Equity markets also strengthened over the last week on better earnings. Macroeconomic data from the US pointed to some improvement in the US housing market, and the manufacturing sector might quicken after the soft patch in the second quarter,” Zhang said.

Corporate energy stock prices climbed higher July 22, but broader markets were flat, said analysts in the Houston office of Raymond James & Associates Inc. However, they looked for futures prices to be “sharply lower” in early trading July 25 as continued brinkmanship between Democrats and Republicans fanned fears they will not reach agreement on debt and budget cutbacks before the Aug. 2 deadline.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The main macroeconomic input of last week was the European Union agreement on a second rescue plan…for Greece. This being the EU, it means that the agreement still needs to be validated by the different parliaments; for Germany, that will not come before Sept. 6. The details of the plan are still to be worked out. For now it buys some time, but it is not preventing the rating agencies from downgrading Greece further.”

Jakob said, “The political circus over the US debt level will probably last until the last hours before Aug. 2.”

Zhang said, “The US debt will be dominating the headlines, as the Aug. 2 deadline is fast approaching.” But barring a US default, he said, “We do not see significant impact on the oil market to the downside. Instead, an agreement over US debt-ceiling and budget is most likely to boost the oil market, together with other risky assets. We believe that the oil flat price remains supported by strong investment demand and abundant dollar liquidity, while refining margins are likely to come under pressure from high refinery runs and soft demand.”

The latest US Commodity Futures Trading Commission report showed money managers increased their net length in crude sharply, by 7.6% from the previous week (on futures and options combined basis). Commercial hedgers’ net short positions grew significantly, by 9.5% in the week. “The data suggested both consumers and producers continue to step aside from hedging activities, as growth in consumers’ long-hedging outstripped increases in producers’ short-hedging positions. Meanwhile, swap dealers increased their net short positions further. The non-commercial net long position as a percentage of open interest stood at 7%, a half percentage point increase from last week,” said Zhang.

Standard & Poor’s 500 index gained 2.19% last week, reversing losses of the previous week, and was up 6.95% for the year. The NASDAQ gained 2.47% for the week and is up 7.76% for the year, once again testing the peaks of 2007.

“In the S&P we are back to a situation where apart from the financial sector most of the other sectors are close to record high levels. It is not the first time that we are at such levels in 2011, but at those elevated levels the S&P has each time failed to attract further momentum since we are still in a situation of high unemployment level and lower than expected gross domestic product in the West while China continues to implement policies to prevent overheating,” Jakob warned. “During the week, the best performing S&P sector was again energy sector. For the year, energy is still the best performing sector (up 17%) and financials the only sector in the red (down 3.9%).”

He noted cash assets of US commercial banks during the week and “very close to their recent record high levels” of $2 trillion.

Citing a weekend article in Barron’s magazine, Raymond James analysts said the disconnect between WTI prices relative to seaborne crudes (North Sea Brent and Light Louisiana Sweet) along with the consequent rebound in refining margins for domestic refiners able to obtain the cheaper feedstock “remains one of the key bullish themes within the refining industry,” providing earnings momentum that sparked the shares of many refiners earlier this year. They said, “The refiners have been the best performing group in energy year-to-date. The question remains though as to how sustainable are current crack spreads (above $30/bbl), particularly given the oil demand headwinds domestically and abroad?”

In other news, Raymond James analysts reported US coal exports “continue tracking toward a 20-year high. “If one thinks about the robust 10- to 20-year projections for global coal demand growth and then considers the fact that approximately 30% of the known worldwide coal reserves reside in the US, it should come as no surprise that the U.S. should see increasing exports over time,” they said.

AccuWeather.com reports prolonged dry conditions from the Midwest to the mid-Atlantic this summer have already affected the corn crop, an important staple along the parched agricultural zone from Iowa to Pennsylvania.

Throughout the spring months, persistent rain delayed planting in many parts of the Corn Belt, while quick drying turned the soil as hard as concrete, the online weather service reported. With corn now in tassel, there's no rain to aid in pollination, and the plants are stressed. The reduced crop yield might force farmers to incur additional costs of buying feed for animals. Of course, it will also affect the ethanol market.

Energy prices
The September and October contracts for benchmark US light, sweet crudes each increased by 74¢, to $99.87/bbl and $100.20/bbl, respectively, July 22 on the New York Mercantile Exchange. The front-month contract traded as high as $100.21/bbl during that session. On the US spot market, WTI at Cushing, Okla., dropped 63¢ to $99.56/bbl as it tried to get in step with the front-month futures contract.

Heating oil for August delivery and reformulated blend stock for oxygenate blending for the same month both closed at $3.13/gal on NYMEX, up 2.88¢ and 3.06¢, respectively.

The August contract for natural gas inched up 0.4¢ but closed essentially unchanged at a rounded price of $4.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 9.8¢ to $4.47/MMbtu.

In London, the September IPE contract for North Sea Brent rose $1.16 to $118.67/bbl. Gas oil for August dipped 50¢ to $982.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 46¢ to $113.66/bbl. So far this year, OPEC’s basket price has averaged $107.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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