MARKET WATCH: Economic fears bring down oil prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 11 -- Oil prices dropped July 8 following a discouraging employment report that agitated market fears of a stalled economy. Prices for crude contracts fell on the New York market, wiping out the previous session’s gains that were based on better-than-expected private-sector job data and strong retail sales (OGJ Online, July 7, 2011).

Standard & Poor’s 500 index posted a 1% loss, “which marked the first negative day since June 24,” said analysts in the Houston office of Raymond James & Associates Inc. “The economy added a paltry 18,000 jobs in June after a downwardly revised 25,000 estimate in May. The Oil Service Index and [SIG Oil Exploration & Production Index] EPX followed the broader market with a decline of 1%. Earnings [reports] from many bellwether companies are set for this week, but all eyes remain on global macrofundamentals, including China, which reported a multiyear inflation high July 10.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said the S&P 500 gained only 0.31% during last week. “If the surge of the previous week continued July 7 with the ADP report indicating stronger-than-expected job creation in the private sector, the advance was put to a stop July 8 when the nonfarm payrolls and the unemployment level came out to be much worse than any of the expectations.”

It was again the financial sector that suffered most, although the amount of cash held by commercial US banks reached a new record high above $2 trillion.

“The job numbers for June were extremely disappointing, and we do not think that anyone managed to produce a positive spin on them. For the first 6 months of 2011, the nonfarm payrolls increased in total as much as they were coming down in only 1 month in 2009. At the current rhythm, it will take another 3½ years before the lost jobs of 2009 can be erased,” Jakob said.

The US unemployment rate inched up 0.1% to 9.2%. “It is only a small increase,” Jakob said, “but it is also the third month where the unemployment rate has increased and compared to the 9.5% of June 2010, it is difficult to talk of any significant improvement, especially since the participation rate continues to trend lower and at 64.1% (compared with 64.7% in June 2010) is at a 25-year low.”

During last week, he said, “China increased interest rates further (up 6.56% on 1 year), but this was widely expected as China continues to struggle with runaway inflation. The extent of the Chinese inflation problem was highlighted over the weekend with the publication of the June consumer price index (CPI), which was above expectations with a print at 6.4%, with food inflation reaching a high [of] 14.4% (compared with the 11.7% for food inflation in May). With the current level of inflation, we expect that China will do one more 0.25% rate increase before the end of the year.”

Meanwhile, inflation in Europe remains “above target, and as expected the European Central Bank increased rates as well on July 7.” Jakob reported, “The ECB increasing rates did not bring any support to the euro. First, it did not come as a surprise but rather as a confirmation, and second the risk assessments are starting to be increased over Italy and as a consequence the bond yields for that country are starting to rise at an increasing pace.” Yields for Portugal have been increasing strongly, too (5-year bonds for Greece are at 21.4% and at 16.9% for Portugal). “The situation is serious enough that the EU president has apparently called over the weekend for an emergency meeting July 11 to discuss not only Greece but also the developing market situation in Italy. A ban on short selling in the Italian stock market could also be implemented; for now the Italian regulators have imposed the obligation for short sellers to disclose their positions,” he said.

Jakob reported, “The main change during the week in relative values was again in the Brent premium to West Texas Intermediate, which widened further to a premium of $22/bbl, a level not seen since the previous roll period of the commodity indices. Goldman Sachs Group Inc. sees the Brent premium to WTI at $3.50/bbl in 12 months; Citi sees it at $40/bbl. The spread between the two futures benchmarks is functioning with such a lack of a fundamental link that it allows for very wide expectations. In our opinion the growing problem for the Brent contract is that it is losing some reactivity to market inputs.”

On July 7, Jakob said, “Both WTI and Brent traded higher as the ADP numbers were providing some hope for strong job creation. When the nonfarm payrolls came out much worse than expected [on July 8], WTI logically traded down but not Brent. This means that if Brent is a great contract to be positioned in on the long and passive side, the fact that it is losing some reactivity to inputs makes it a contract harder to use to trade; a futures benchmark needs to react both down and up to be a proper trading instrument. In our opinion, Brent is currently too dependent on flows.”

The 3-2-1 refinery margins on the basis of WTI gained $4.40/bbl during the week. “Again this is mostly a function of the gain of Brent vs. WTI, although the refineries in the Midwest will not complain too much with the fact that trading on the Brent-WTI spread is providing them with a 3-2-1 WTI crack of $33.70/bbl,” said Jakob. “Over the last 2 weeks, the 3-2-1 WTI August crack has gained $10/bbl. The 3-2-1 vs. Brent (i.e. reformulated blend stock for oxygenate blending and heating oil vs. Brent) has however lost 60¢/bbl during the week and gained ‘only’ $2/bbl over the last 2 weeks.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The divergence between Brent and WTI is also pronounced in their term structures; the term structure for WTI weakened, while Brent’s structure strengthened.”

In other news, James West, Barclays Capital, reported work stoppages by unionized oil workers in Brazil have idled several Petroleo Brasileiro SA (Petrobras) facilities in a dispute over employee compensation. On July 6, the state-owned company reduced employee hours at upstream facilities, “including 35 offshore platforms in the Campos basin and several exploration and production facilities,” said West. “If this challenge persists, it may cause near-term delays and downtime for the drillers and potentially affect equipment manufacturers with operations in Brazil.”

Saudi crude
An oil producer trying to sell 1 million b/d of additional supply frequently will cut his price to lure refiners. “But this is not what Saudi Arabia is doing despite pledging additional supplies to the market,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “For refiners in the Mediterranean, Saudi Aramco’s crude differentials for August against the ICE…benchmark are up $1.65/bbl compared with levels in March. Compared with July, they rose by 10¢/bbl. For Far Eastern destinations, their spread to the Oman-Dubai average has risen by 5¢/bbl compared with March values although they are 10¢/bbl down compared with July values.”

They said, “Refiners look likely to balk at these prices. That would allow Saudi Arabia to claim that there is no demand for the extra barrels, so there is no need to raise production to 10 million b/d.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped $2.47 to $96.20/bbl July 8 on the New York Mercantile Exchange. The September contract fell $2.44 to $96.70/bbl. On the US spot market, WTI at Cushing, Okla., remained abreast of the front-month futures contract, down $2.47 to $96.20/bbl.

Heating oil for August delivery dipped 0.56¢ to $3.10/gal on NYMEX. RBOB for the same month declined 3.44¢ to $3.09/gal.

The August contract for natural gas climbed 7.2¢ to $4.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.8¢, also to $4.21/MMbtu.

In London, the August IPE contract for North Sea Brent decreased 26¢ to $118.33/bbl. Gas oil for July gained $2 to $962.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up $1.92 to $112.68/bbl. So far this year, OPEC’s basket price has averaged $106.81/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

PHMSA proposes pipeline accident notification regulations

07/02/2015 The US Pipeline and Hazardous Materials Safety Administration has proposed new federal oil and gas pipeline accident and notification regulations. ...

FourPoint Energy to acquire Anadarko basin assets from Chesapeake

07/02/2015 FourPoint Energy LLC, a privately owned Denver company, plans to acquire oil and gas assets from Chesapeake Energy Corp. subsidiaries Chesapeake Ex...

Puma Energy completes purchase of Murco’s UK refinery, terminals

07/02/2015 Singapore-based Puma Energy Group Pte. has completed its purchase of UK midstream and downstream assets from Murco Petroleum Ltd., a subsidiary of ...

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

API to issue recommended practice to address pipeline safety

07/01/2015 The American Petroleum Institute expects to issue a new recommended practice in another few weeks that addresses pipeline safety issues, but the tr...

Shell Midstream Partners takes interest in Poseidon oil pipeline

07/01/2015 Shell Midstream Partners LP has completed its acquisition of 36% equity interest in Poseidon Oil Pipeline Co. LLC from Equilon Enterprises LLC, a s...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

FWS issues Shell letter of authorization on Chukchi Sea lease

07/01/2015 The US Fish & Wildlife Service issued Shell Gulf of Mexico Inc. a letter of authorization (LOA) related to the potential disturbance of polar b...
White Papers

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by
Available Webcasts


The Resilient Oilfield in the Internet of Things World

When Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.

register:WEBCAST



On Demand

Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors

register:WEBCAST


Driving Growth and Efficiency with Deep Insights into Operational Data

Wed, Aug 19, 2015

Capitalizing on today’s momentum in Oil & Gas requires operational excellence based on a clear view of what your business data is telling you. Which is why nearly half* of oil and gas companies have deployed SAP HANA or have it on their roadmap.

Join SAP and Red Hat to learn more about using data to drive process improvements and identify new opportunities with the SAP HANA platform running on Red Hat Enterprise Linux. This webinar will also show how your choice of infrastructure impacts the performance of core business applications and your ability to achieve data-driven insights quickly and reliably.

*48% use SAP, http://go.sap.com/solution/industry/oil-gas.html

register:WEBCAST


OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected