MARKET WATCH: Energy prices continue to slide as economics slump

Energy prices continued their downhill slide Aug. 1 even as doubtful US Representatives worked to pass a compromise $2.4 trillion debt-ceiling increase that evening with the US Senate likely to give its equally unenthusiastic approval today to the bill that will cut spending by $2.1 trillion over 10 years.

Meanwhile, the Dow Jones Industrial Average posted a triple-digit intraday swing in the New York market “after weak US manufacturing data derailed a strong start and ultimately closed marginally lower,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude prices followed suit and settled just below $95/bbl.”

However, above-average temperatures forecast for the eastern US triggered a 1% gain in front-month natural gas futures price. Crude prices were lower and natural gas prices were higher in early trading Aug. 2.

“Oil had a volatile day with an intraday trading range over $5/bbl,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The term structure for North Sea Brent strengthened, while West Texas Intermediate structure weakened,” he said. “Prompt European refining margin softened, led by weaker middle distillate cracks.”

Zhang noted, “The Purchasing Managers Index (PMI) manufacturing survey for the Euro-zone and the US Institute for Supply Management (ISM) manufacturing survey for the US came in [at] 50.4 and 50.9, respectively, indicating the manufacturing sectors at the two major economies barely grew in July. The data were clearly negative and pointing to a very soft economic recovery.” Further soft economic data this week could trigger some liquidation in crude net-length and push the oil price “much lower.” However, he said, “The crude price will still be supported by healthy refining margins, particularly in Europe.”

Zhang said, “The health of the global economy remains the overarching factor in dictating the directions for the oil market. Behind all the sovereign debt concerns in the Euro-zone and the US, there are plenty of signs of a slowdown in economic activity in many major economies. It is likely that the oil market again might have to lean on hopes of further stimulus from monetary policies, which leaves the oil market much more vulnerable for a big fall. For now, we see the risk of a price collapse being very small on strong refining margins, relatively low net speculative length, and hurricane risks. Instead, we see much more downside in WTI structure and refining margins.”

Olivier Jakob at Petromatrix in Zug, Switzerland, claimed, “The positive spin economics do not work anymore as the economic realities have turned too negative to ignore. The Chinese PMI was weak, but that was expected given that the flash estimate had already pointed at a slowdown. The US ISM Manufacturing Index, however, came down much lower than expected by the consensus, another shock-revision in 2 days (the first one being the sharp down revisions to US gross domestic product on July 29). At 50.9, it is not yet a contraction but is getting dangerously close to it. It is the lowest ISM Manufacturing Index since July 2009. If it was only the US ISM that was weak, one could spin a story about snow, rain, or heat, but the problem is that the manufacturing indices across the globe are disappointing.”

He pointed out, “The Chinese PMI is also close to contraction; in Europe the UK PMI released yesterday was also below expectations and showing a contraction, while the German PMI was also coming off from the June levels and was at the lowest level since October 2009. Buying crude oil at $120/bbl knowing that it is a level that destroys demand takes even greater faith than before when the PMIs and GDPs are under attack.”

The dollar index was stronger Aug. 1, “but it was mostly a case of the euro being weaker, i.e. not only to the dollar but also to the Swiss franc,” Jakob said. “We have the impression that the investment flows are starting to panic, and when the only trading strategy still working is to buy the Swiss franc irrespective of the economic fundamentals, we do think that the systemic risks are very large. Globally we feel that there is something not right about the panic buying in the Swiss franc while crude oil and US equities are still being priced near record levels. We also need to keep in mind that if Brent prices go down then the Standard & Poor’s 500 goes down. In such an environment cash has to be king, and in the end that could also become positive for the dollar,” he said.

 

Energy prices

The September contract for benchmark sweet, light crudes declined 81¢ to $94.89/bbl Aug. 1 on the New York Mercantile Exchange. The October contract decreased 80¢ to $95.33/bbl. On the US spot market, WTI at Cushing, Okla., was down 81¢ to match the near-month futures contract at $94.89/bbl.

Heating oil for September delivery dipped 0.2¢ to $3.10/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.39¢ to $3.05/gal.

The September contract for natural gas gained 4.3¢ to $4.19/MMbtu on NYMEX. On the spot market, gas at Henry Hub, , was down 1.1¢ to $4.29/MMbtu.

In London, the September IPE contract for North Sea Brent retreated 7¢ to $116.81/bbl. Gas oil for August dipped 25¢ to $970.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes, on the other hand, regained $1.39 to $113.57/bbl.

 

Contact Sam Fletcher at samf@ogjonline.com

 

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