Energy prices generally dipped lower Aug. 12 ending a 2-day rebound, but US crude remained above $85/bbl in the New York market.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said oil remained “broadly flat” on Aug. 12 “on reasonable US retail sales data but sharply declining consumer confidence.”
Zhang said, “European oil products weakened across the barrel vs. crude, which pushed refining margins down by around $1/bbl. The term structure for Brent and WTI strengthened further on healthy physical demand for crude oil and increased hedging activity.”
He noted, “The recent fall in the oil price might provide some relief against economic headwinds. However, there is empirical evidence of an asymmetric response from economic growth to changes in the oil price. An increase in oil prices were often associated with economic recessions, but oil price decreases did not necessarily bring about corresponding economic booms.”
Meanwhile, analysts at the Centre for Global Energy Studies (CGES) in London said, “The sharp decline in US crude inventories and an increase in total petroleum products supplied in the week ended Aug. 7 helped support main benchmark crude prices last week, as did the limited improvement in the country’s jobless situation. A weaker dollar because of the Federal Reserve System’s decision to maintain ultra-low interest rates until mid-2013 also mitigated downward pressure on oil prices, said
But the most important development last week, they said, was the shift in market focus to the creditworthiness of France because of mounting fears of the eventual cost of bailing out the Eurozone’s weaker members. While recent riots in London and other European capitals have no connection with oil prices, they may be symptomatic of the bleak outlook for economic growth in the developed world and a deep-seated social malaise, CGES analysts said.
Political leadership lacking
“At the moment, policy makers seem incapable of dealing with the problems threatening global recovery, having precious few options left,” CGES analysts said. “In Europe, political opposition—particularly in Germany—to the bailouts for the Eurozone’s weaker members, as well as confusion about the European Central Bank’s role in the crisis, has meant growing uncertainty in the bond markets about the European Union’s ability to deal with its members’ debt problems. The latest country to come under intense scrutiny is France, demonstrated by the fact that the cost of credit default swaps—a form of insurance against default—for its 10-year bonds leapt to 175 basis points, compared with 55 for the US. Until Europe’s leaders alight on a long-term solution and concerns about the Euro-zone’s creditworthiness abate—so far there are few signs of this occurring—the prospect of a return to stable worldwide [economic] growth is minimal, and this will continue to be reflected in oil prices.”
US authorities’ response to an extremely weak economic recovery is of equal concern to CGES analysts and others. “[Fed Chairman] Ben Bernanke’s pledge that interest rates will remain at ultralow levels for the next 2 years is unprecedented, and it is quite possible that this will be followed by further quantitative easing (QE),” they said. While implications of a weakened US currency and increased inflationary pressures of the US administration’s “cheap-money policy” are serious, analysts said, this excess liquidity may not have the same affect on oil prices as in the past few years.
CGES analysts said, “This time around, the effects of the carry trade on oil prices—whereby market players borrow in US dollars and invest in perceived assets such as oil—are likely to be outweighed by the deteriorating prospects for economic growth. Any investors thus expecting a QE3 driven surge in the oil price may be disappointed. Of greater significance is whether the Organization of Petroleum Exporting Countries decides to limit any growth in its oil output, or even cut production, when faced with weakening global demand for its crude.”
They pointed out, “Although Saudi Arabia pledged it would raise production to meet any shortfall in supply over the summer months and has lifted its output by nearly 750,000 b/d since May, it has done little to make its export grades more attractive to refiners by increasing discounts against benchmark crudes. Indeed, the only region for which the relative price of Saudi Arabia’s Arab Light crude has fallen in recent months is Asia-Pacific, where the grade’s premium over the Dubai-Oman average has been cut from $2.15/bbl for June to 75¢/bbl for September. For US buyers, the September Arab Light premium over the Argus Sour Crude Index benchmark is the highest it has been all year, while European buyers have seen the discount to the IntercontinentalExchange’s Brent weighted average price narrow from more than $4/bbl for June to just $2.05/bbl for September.”
The September contract for benchmark US light, sweet crudes dipped 34¢ to $85.38/bbl Aug. 12 on the New York Mercantile Exchange. The October contract lost 35¢ to $85.69/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., remained in step with the front-month futures contract, down 34¢ to $85.38/bbl.
Heating oil for September delivery inched up 0.45¢ to $2.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 0.51¢ to $2.82/gal.
The September contract for natural gas dropped 4.8¢ to $4.06/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 5¢ to $4.13/MMbtu.
In London, the September IPE contract for North Sea Brent advanced 1¢ to $108.03/bbl. The new front-month September contract for gas oil escalated by $12.50 to $917/tonne.
OPEC offices in Vienna were closed Aug. 15, with no update of the average price for the group’s basket of 12 benchmark crudes.
Contact Sam Fletcher at email@example.com.