MARKET WATCH: Negative economic signals undercut energy prices

Congress hammered out an agreement to increase the US debt limit, but energy prices continued dropping Aug. 2 with equity markets down and weak economic signals in both the US and the Euro-zone.

In Houston, analysts with Raymond James & Associates Inc. reported, “Italy and Spain resurrected the Euro-zone crisis on worries of their own debt woes.” That “certainly isn't good for the global economy,” they said, “especially after a report by the US Commerce Department showed a drop in consumer spending of 0.2% for June, the first spending decline since 2009. The market was hammered on the news, with the Standard & Poor’s 500 Index down 2.6% and the Dow Jones Industrial Average down 2.2%. Crude and natural gas followed market sentiment, dropping 1.7% and 0.9% respectively.” Oil prices were still declining in early trading Aug. 3 although natural gas was up.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The euro remains weak, and while the focus has been in recent days on the political circus over the US debt levels, the bond yields for Italy have risen to levels that basically put Italy at par to Spain. In this environment we do not really see how Europe is going to be able to implement the Greek rescue plan, and if the European rescue fund is not big enough to rescue Spain it is certainly not big enough to rescue Spain and Italy.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The financial market appears to have quickly moved on from the US debt ceiling. Behind the sovereign debt drama in the US and Euro-zone, there is a rather weak economy. The 3.1% annual growth rate in 2011 assumed in the debt-ceiling agreement does not look remotely possible, as growth in the first half of this year managed a mere 0.8%.”

Zang said, “The Italian 10-year government bond yield has exceeded 6%. Clearly, the second Greece bail-out has yet to calm the market over the Euro-zone debt crisis. In our view, the oil market is likely to be led by the macro-events for the rest of this quarter. For now, we assume no double-dip recession. We therefore see oil in range-bound [price] pattern in the third quarter and set to trade higher in the fourth quarter.”

With the Swiss franc at a record high Aug. 2, Jakob said, “At current levels Switzerland will be faced with very serious deflation, and board members of the Swiss National Bank have come back from their summer holidays, lowering the target rates even lower and warning that it could start to intervene in the foreign exchange markets.” He also noted, “The Bank of Japan has started verbal intervention, warning that it could start soon to intervene.”

Jakob said he remains unconvinced an intervention on the Swiss franc will be the vehicle to fuel world oil demand.

“The S&P 500 is down 7 days in a row, something that has not happened since October 2008. It is now also in the red for the year-to-date, the third time so far this year that it has tested those levels.” Jakob said.

The latest MasterCard Spending Pulse report on retail gasoline sales at the pump showed US demand down 3.1% from the comparable week of 2010 and down 1.9% vs. 2010 on the 4-week average.

In other news, Jakob noted, “The calculated paths for Tropical Storm Emily are mostly showing it moving up to the East Coast rather than the US Gulf Coast. The storm still needs to be monitored but is currently not a positive input for oil prices.”

 

Oil inventories

The Energy Information Administration said Aug. 3 commercial US crude inventories increased by 1 million bbl to 355 million bbl in the week ended July 29. That’s well below the Wall Street consensus of 2.3 million bbl based on deliveries of crude earlier sold from the US Strategic Petroleum Reserve. Yet it raised stocks above the average level for this time of year. Gasoline inventories rose 1.7 million bbl to 215.2 bbl last week, exceeding analysts’ expectations of a 1 million bbl gain. Finished gasoline inventories decreased while blending components inventories increased. Distillate fuel inventories inched up just 400,000 bbl to 152.3 million bbl, EIA said, far short of market anticipation for a 3.4 million bbl build.

The American Petroleum Institute earlier issued a bullish report showing US crude inventories down 3.3 million bbl to 354.9 million bbl in the week ended July 29. API said gasoline stocks were up 2.5 million bbl to 212.2 million bbl last week, with distillate inventories climbing 1.4 million bbl to 150.7 million bbl.

EIA said imports of crude into the US fell by 706,000 b/d to 9.1 million b/d last week, undercutting analysts’ consensus for a bigger inventory build. In the 4 weeks through July 29, crude imports averaged 9.3 million b/d, down by 681,000 b/d from the comparable period a year ago. Gasoline imports averaged 845,000 b/d last week, while distillate imports averaged 205,000 b/d.

The input of crude into US refineries increased 129,000 b/d to 15.5 million b/d last week with units operating at 89.3% of capacity, EIA reported. Gasoline production decreased to 9.1 million b/d while distillate production increased to 4.6 million b/d.

EIA released its most recent supply data for May, showing Lower 48 gas production down 40 MMcfd sequentially, but with April production revised up 200 MMcfd. Raymond James analysts noted, “EIA has put out upward revisions each of the past 7 months (averaging increases of 150 MMcfd for each revision). As a result they said, “We wouldn't be surprised if May ends up showing slight growth if the numbers are revised next month. And the supply train keeps on rolling.”

 

Energy prices

The September contract for benchmark US light, sweet crudes dropped $1.10 to $93.79/bbl Aug. 2 on the New York Mercantile Exchange. The October contract lost $1.13 to $94.20/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.10 to $93.79/bbl.

Heating oil for September delivery dipped 0.58¢ to $3.09/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 1.67¢ to $3.04/gal.

Zhang said, “European refining margins fell by 50¢/bbl as product cracks across the barrel weakened.” WTI structure strengthened slightly following API’s report of a 1 million bbl draw of crude from Cushing storage as Midwest refinery runs set “a new seasonal record high.” Zhang said heavily-discounted WTI “provided significant incentives to refineries” in the Midwest and is likely to pressure competitors in other districts, particularly along the Gulf Coast.

The September contract for natural gas fell 3.3¢ to $4.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 3.2¢ to $4.25/MMbtu.

In London, the September IPE contract for North Sea Brent slipped by 35¢ to $116.46/bbl. Gas oil for August was down $3.25 to 967.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $1.72 to $111.85/bbl.

Contact Sam Fletcher at samf@ogjonline.com

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