MARKET WATCH: Market turmoil tumbles energy prices

Dragged down by the turmoil in financial markets, energy prices tumbled Aug. 18 below week-ago levels in the New York market, wiping out gains from earlier this week.

“A weaker US dollar, partly the result of the Federal Reserve Bank’s avowed intention to maintain a loose monetary policy, lent some support to the main crude benchmarks early on,” said analysts at the Centre for Global Energy Studies (CGES), London. “However, the failure of French President Nicolas Sarkozy and German Chancellor Angela Merkel to offer concrete solutions to the problems in the Eurozone spooked investors across all sectors. These fears were compounded when it emerged that the European Commerce Bank had lent $500 million to a beleaguered European bank and by weak jobless data from the US.”

CGES analysts said, “In addition to this crisis of confidence, there are also clear signs that oil demand is weakening. Ex-refinery deliveries of oil products in the US dropped year-on-year by over 280,000 b/d in the second quarter, while Chinese crude imports fell in July to their lowest level for 9 months.” The only potential good news they reported is the Moammar Gadhafi regime might not be able to hold on after the reported capture of the Zawiya refinery by Libyan rebels.

In Houston, analysts with Raymond James & Associates Inc. reported, “A 9,000-person rise in jobless claims, a 0.5% consumer price index (CPI) increase, and global economic growth cuts by two bulge-bracket firms that sent the Dow Jones Industrial Average below the 11,000 mark (down nearly 4%) for the first time in five sessions. Crude followed suit, with West Texas Intermediate (WTI) also down 6%, which sent the [SIG Oil Exploration & Production Index] EPX and the Oil Service Index down 7% apiece.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Crude oil went to $130/bbl in the first half of 2011, and the world is falling towards recession in the second half of 2011.” He said, “Our global theme throughout this year has been that the world economy was not fit enough to happily absorb oil prices above $100/bbl and the macroeconomic data is turning worse and worse.”

The recent Philadelphia Federal Reserve Bank survey on manufacturing and US leading indicators “was at the lowest level since March 2009 and was miles away from expectations, the CPI higher than expected, and now all the main financial institutions are revising down sharply their gross domestic product forecasts. Unemployment has already started to tick-up in France, and with the Fed surveys so low it is reasonable to expect an increase in US unemployment soon, something that will further hit consumer sentiment,” Jakob said.

He said, “WTI prices have fallen sharply and are basically back to the range of 2010 but that will do very little to help the economy or consumer sentiment. The reason being that with the Brent premium to WTI reaching new record highs near $25/bbl, the price that the consumer pays for oil is providing no relief. We are gently moving out of the gasoline season and…heating oil prices will be at a record level for the winter. No significant price relief for the consumer or the industry there. Combine this with low consumer sentiment and no improvement or an increase in unemployment, and it is fair to assume that we have not yet left the demand destruction zone.” Gasoline and heating oil are still not “cheap,” especially with the current state of the economy, he said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Despite the sharp fall in flat prices, the term structures for Brent and WTI were firmer yesterday, signaling a still tight underlying physical market.”

Zhang said, “We weren’t confident about the recovery in risk-taking at the beginning of this week, as bond yields were still moving down. While the market is under huge pressure from a decelerating global economy, abundant liquidity could make a sharp rise in risk aversion fleeting, which almost ensures a period of high market volatility.”

Zhang said, “For now, the oil market can draw some support from fairly tight supply-demand fundamentals and a further liquidity increase from possible policies like [a third round of quantitative easing (QE3)]. However, a recession in the US or Euro-zone, even a mild one, in the next 6 months would override these two supporting factors and cause a substantial fall in oil prices.”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Despite downgrades to US, European, and Asian growth this week, we believe Chinese oil stockpiling initiatives both on a commercial and strategic level may offset potential ‘real’ demand weakness this year as well as over the medium-term.”

Energy prices

The September contract for benchmark US light, sweet crudes fell $5.20 to $82.38/bbl Aug. 18 on the New York Mercantile Exchange. The October contract dropped $5.22 to $82.51/bbl. On the US spot market, WTI at Cushing, Okla., was down $5.20 to $82.38/bbl.

Heating oil for September delivery decreased 8.68¢ to $2.87/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was down 8.71¢ to $2.78/gal.

The September contract for natural gas declined 4.1¢ to $3.89/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ but was essentially unchanged at a rounded $3.98/MMbtu.

In London, the October IPE contract for North Sea Brent lost $3.61 to $106.99/bbl. Gas oil for September fell $25 to $911.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $1.46 to $105.42/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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