MARKET WATCH: Energy prices fall as Bernanke tables QE3

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 15 -- The broader market and commodities fell July 14 with crude down 2%, giving back most of its gains over the previous two sessions in the New York market, as Federal Reserve Chairman Ben Bernanke said he isn’t inclined to embark “soon” on a third economic stimulus.

Energy commodity prices had climbed July 13 when Bernanke hinted a third round of quantitative easing (QE3) might be in the works.

“Oil fell sharply, particularly in West Texas Intermediate, as hopes of further quantitative easing in the US were dented and as fears rose over the sovereign debt crisis in the Eurozone and US,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “After raising hopes of QE3 the previous day, Bernanke’s second day of testimony to the US Congress was taken by market participants as being less supportive of such as move. This dented risky assets across the board and saw speculative selling of most commodities.”

Furthermore, Ground said, “The prospect of a possible downgrade in US debt ratings (after Standard & Poor's Financial Services LLC joined Moody's Investors Service in placing the US on review for downgrade) is adding to downward pressure on oil markets. To avoid these downgrades the US government must reach an agreement by the beginning of August on increasing the debt ceiling to prevent a possible default. These default and downgrade concerns overshadowed some slightly better-than-expected data flow on the US economy. Retail sales advanced 0.1% month-over-month in June, although the figure excluding auto sales remained unchanged. Initial jobless claims fell slightly to 405,000 after a revised increase of 427,000 in the previous week. Nevertheless, business inventories rose 1% month-over-month in May, which might be a sign of waning demand.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “If anybody in Washington, DC, was watching the price of oil the last 2 days, then the conclusion should be that the best policy to achieve lower oil prices is not to pump Strategic Petroleum Reserve crude out of the ground caverns but to ground ‘Helicopter Ben’ [Bernanke].” Jakob reiterated, “It will be very difficult for the Fed to launch another QE with gasoline prices near $4/gal.”

He predicted, “The focus for the weekend and for next week will be on the US debt ceiling but also on the European crisis management. WTI has not been able to break the resistance of $100/bbl, and many forecasters are now calling for crude oil to trade a range rather than trade a trend. Indeed, it is difficult to find enough inputs in the oil fundamentals to put a position on and believe that it could withstand a headline on the US or the South European debt. Volume in WTI was relatively high yesterday, but we expect to see a slower trading day today.”

There are “not a lot of new fundamentals to digest,” said Jakob. “The demand numbers for Italy show gasoline sales down 5.2% in June vs. the same month in 2010 while diesel sales were up 2.5% (May was down 3.4% for gasoline, up 3.7% for diesel).” He reported, “Rail traffic in the US for the week ending July 9 was down 3.2% vs. a year ago, which will be something to watch in coming weeks as it is starting to be a change of trend from the positive numbers seen so far this year.”

Ground said, “Market participants will be looking for any signs of a weakening US economy to confirm last week’s disappointing payrolls numbers. Should industrial activity and consumer confidence be shown to be waning, this could spell further downside for oil. Given the preoccupation with problems in the government bond market, better-than-expected data will most likely get little reaction.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped $2.36 to $95.69/bbl July 14 on the New York Mercantile Exchange. The September contract lost $2.38 to $96.11/bbl. On the US spot market, WTI at Cushing, Okla., kept in step with the front-month futures contract, down $2.36 to $95.69/bbl.

Heating oil for August delivery declined 1.48¢ to $3.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 2.68¢ to $3.12/gal.

The August natural gas contract decreased 2.5¢ to $4.38/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 4.6¢ to $4.39/MMbtu.

In London, the August IPE contract for North Sea Brent crude dipped 46¢ to $118.32/bbl. Gas oil for August fell $10.50 to $972.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes declined 51¢ to $112.74/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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