MARKET WATCH: Oil prices continue falling due to economic fears

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 12 -- Crude oil prices continued declining July 11, falling 1% in the New York market while the dollar strengthened as did fears that energy demand will decrease as China tightens its economy to combat rising inflation.

US corporate stocks gave their worst performance in nearly a month as the Standard & Poor’s 500 index fell 2% “on reports of a possible orderly Greek default and growing concerns over the [sovereign debts of] Portugal, Italy, Ireland, Greece, [and] Spain (PIIGS),” said analysts in the Houston office of Raymond James & Associates Inc. Stalled negotiations on the US debt ceiling as the Aug. 2 deadline creeps closer also undercut the market, they said, with energy stocks underperforming.

“Natural gas proved to be more resilient as prices gained 2% on forecasts of hotter-than-expected weather,” they said. The price of crude continued its retreat while natural gas and the broader market futures were flat in early trading July 12.

“Oil products, which saw product cracks and refinery margins improve, fared better than crude” in the July 11 sell-off, said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The correction in the Standard & Poor’s 500 index was pretty severe and the euro broke through the…support both yesterday and in overnight trading. American asset managers do not like the dollar, but given that not a week goes by without a new breakdown in Europe, we see the risk that at [some] stage they might give up on the old continent.”

He said, “Global markets continued to digest the worse-than-expected nonfarm payrolls [from last week].”

The US Department of Energy said July 11 it awarded contracts for all 30 million bbl of crude to be sold to refiners from the Strategic Petroleum Reserve. DOE said 7 million bbl of SPR crude likely will be delivered this month, with the rest to be delivered in August. “If this materializes, it will be ahead of the original plan to deliver all the oil in August,” said Zhang, who expects the DOE to report July 13 a “sizable draw in US crude stocks again on lower imports,” since last week’s commercial inventories were not yet affected by the SPR release.

In contrast to popular demand for US SPR crude, Zhang said, Germany sold only 63% of the total 4.2 million bbl of the high-sulfur oil it offered. Because of the low sale from Germany, the total International Energy Agency reserve release will amount to 59.83 million bbl, slightly below the 60 million bbl originally tendered, including 30 million bbl of US crude.

Jakob said, “Thankfully the price bid by Petrochina for 500,000 bbl was too low—otherwise we can imagine the political backlash that would have followed.” Among large traders, he said, Vitol Inc., Houston, was successful on all the 4 million bbl it was bidding for. BP PLC received only 500,000 of the 7 million bbl it was bidding. Morgan Stanley Ventures Energy Corp., Stamford, Conn., was unsuccessful in its bid for 1.9 million bbl; likewise for Mercuria Energy Group Ltd. for its 1.3 million bbl bid [and] Glencore International PLC for its 2 million bbl bid.

Earlier, Larry Goldstein, special projects director at the Energy Policy Research Foundation Inc., Washington, DC, told OGJ that 24 of the 52 apparently successful bids announced by the DOE “were well below the 5% discount range.” The low bidders “understood the system and knew how to game it,” said Goldstein. They recognized the US government was determined to sell the crude to force down prices, “not merely offer it for bidding.” As a result, some companies submitted initial bids for specified amounts of crude and then bid for additional amounts at prices “$2/bbl lower,” he said (OGJ Online, July 7, 2011).

“This sale, which has proven to be poorly timed, has subsidized a part of the refining sector that the White House was going after for allegedly getting too many subsidies,” said Goldstein. “ConocoPhillips and ExxonMobil Corp., to their credit, tried to play it straight. But [other] traders understood the administration’s intent, which was to move 30 million bbl of oil, and were able to aggressively bid and win.”

The lowest apparently successful bid was $104.98/bbl submitted by Barclays Bank PLC for 200,000 bbl of SPR crude. Valero Energy Corp., San Antonio, had “multiple successful bids,” paying as little as $105.62/bbl and as high as $109.76/bbl, Goldstein said. J.P. Morgan; Hess Energy Trading Co. LLC (Hetco), New York; Trafigura AG, Houston; and BP Oil Supply, Chicago “had winning bids from as low as $105.01/bbl (Hetco) to $105.33/bbl (J.P. Morgan),” he said. “Vitol had four successful bids, all at a relatively high offer of $108.05/bbl.”

In other news, Zhang said Eurozone financial ministers failed to reach agreement at a July 11 meeting on how to deal the Eurozone’s sovereign debt. “Meanwhile, the yields of Spanish and Italian 10-year government bonds closed at 6.03% and 5.68% yesterday and have risen further this morning,” he said. “Concerns about Eurozone sovereign debt has sent commodities and equities markets tumbling.”

Zhang and others expect more weakness in the physical oil market as the released IEA reserves hit the market or “show up in commercial storage” in coming weeks.

Energy prices
The August contract for benchmark US sweet, light crudes dropped $1.05 to $95.15/bbl July 11 on the New York Mercantile Exchange. The September contract lost $1.08 to $95.62/bbl On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.05 to $95.15/bbl.

Heating oil for August delivery slipped 0.89¢ to $3.09/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.21¢ to $3.07/gal.

The August natural gas contract rose 8.3¢ to $4.29/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 17.1¢ to $4.38/MMbtu.

In London, the August IPE contract for North Sea Brent crude dropped $1.09 to $117.24/bbl. Gas oil for July lost $4 to $958.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $1.33 to $111.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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