MARKET WATCH: Oil drops below $80/bbl; gas price rises

Crude oil prices continued to fall Aug. 9 with crude dropping below $80/bbl despite a volatile rally across markets after Federal Reserve Bank officials surprised analysts by pledging to keep a near-zero benchmark interest rate until mid-2013.

The Fed originally lowered interest rates near zero in 2008 and had since said rates would remain low for a nebulous “extended period.” The bad news is it now expects the economy to remain weak 2 more years, longer than it previously indicated. Fed officials also indicated a possible third round of bond purchases in an ongoing effort to stimulate the flagging US economy.

“The Fed had a more negative view on the US economy, and that will not alleviate the fears of…recession.” said Olivier Jakob at Petromatrix in Zug, Switzerland.

The Fed’s announcement came less than an hour before the close of New York markets and had the intended effect of triggering a rally, with the Dow Jones Industrial Average staging one of the biggest turnarounds ever as it recovered two thirds of its large loss from the Aug. 8 session (OGJ Online, Aug. 9, 2011).

“The Fed did not come up with an immediate magic trick, but given that it had to provide some sort of new idea, it [set] a fixed-time duration for the current low rates,” said Jakob. But amid abundant evidence the US economy “is in a soft patch,” he said, “it is not like anybody was expecting them to raise rates soon, so in terms of rates outlook we do not think that it changes much.”

Fed and Chinese factors

Jakob reported, “The immediate [effect] of the Fed release was to send the Swiss franc into the stratosphere. The stock market subsequently made a very strong rebound and crude oil as well, but the initial price movement in the Swiss Franc was so brutal (it moved from the high to low during the day by more than 6%, which is abnormal for a currency) that we think it contributed to trigger an across-asset-class algorithmic frenzy. We remain therefore cautious in reading the late market rebound too optimistically.”

Sure enough, corporate stocks were reported falling again Aug. 10 in Europe and in early trading in the US, with the DJIA down 2.7% and the Standard & Poor's 500 index down 2.6%. In Europe, an index of leading British shares was down 1.4% while indexes in Germany and France declined 2.5% as markets appeared to shake off the Fed’s announcement.

In Houston, however, analysts with Raymond James & Associates Inc. said, “The crude market seems opportunistic…on news that Chinese exports grew faster than expected in July.” As a result, they said crude futures were up “a whopping 4% on the news” in early trading Aug. 10 while natural gas remained steady.

Jakob said, “Chinese crude oil imports in July were 100,000 b/d higher than a year ago, which is not a big number and follows June that was 630,000 b/d lower than a year ago. Over the last 3 months, Chinese crude oil imports were up 117,000 b/d vs. 2010 and on a year-to-date basis they are 300,000 b/d higher.”

He said, “Chinese car sales in July were slightly lower than June and are [up] 6.7% vs. last year (about the same growth as in June). Given the strong sales in the fourth quarter of last year, we expect to see some negative growth numbers in Chinese car sales from September to December.”

IEA update

Meantime, the International Energy Agency in Paris updated its report on world supply and demand, reducing its 2011 global demand forecast to 89.5 million b/d from 89.6 million b/d previously, citing weaker baseline data, high prices, and slowing economic growth (OGJ Online, Aug. 10, 2011). “However, due to Japan's oil-power needs, the 2012 demand outlook was raised by 100,000 b/d to 91.1 million b/d,” said Raymond James analysts. “The moves bring 2011 closer to our 89.3 million b/ estimate, though we remain on the conservative side of 2012 at 90.4 million b/d.

On the supply side, July world production rose 600,000 b/d to 88.7 million b/d, “with non-OPEC production (i.e., Canada) representing the majority of this increase,” Raymond James analysts noted. “However, due to prolonged production outages, 2011 non-OPEC supply was cut by 100,000 b/d to 53 million b/d, with 2012 at 54 million b/d; we're at 52.9 and 53.5 million b/d. Despite economic concerns, we continue to see the market tightening, as the Organization of Petroleum Exporting Countries’ spare capacity shrinks to 1.1 million b/d by the end of 2011 and 500,000 b/d by the end of 2012,” they said.

Jakob said IEA “still has a demand growth of 1.6 million b/d but highlights that it is forced in its methodology to use the International Monetary Fund’s gross domestic product forecasts and therefore uses a 4.4% world GDP growth for 2012. The unofficial IEA demand forecast (presented as an alternative) with GDP growth at 3% has world demand growth down to 600,000 b/d for next year and would bring the call on OPEC in 2012 to 29.5 million b/d compared [with] current production of 30 million b/d,” he said.

“Bottom line,” said Jakob, “the IEA is politely asking its readers to ignore its official demand forecast for 2012 and guess their own between the official 1.6 million b/d increase in demand and the alternative scenario [of a] 600,00 b/d increase.” He said, “The IEA has slightly reduced its demand outlook for China in 2012 and notes its calculation of Chinese apparent oil demand showed in June a contraction, the first time since March 2009.”

US inventories

The Energy Information Administration said Aug. 10 commercial US crude inventories fell 5.2 million bbl to 349.8 million bbl in the week ended Aug. 5, surprising Wall Street analysts who expected a 1.4 million bbl build. Nevertheless, crude inventories remained slightly above average for this time of year. Gasoline stocks dropped 1.6 million bbl to 213.6 million bbl in that same period, again thwarting analysts’ consensus for an increase of 900,000 bbl. Finished gasoline inventories increased while blending components declined. Distillate fuel stocks decreased 700,000 bbl to 151.5 million bbl vs. market projections of a 1.1 million bbl increase, EIA said.

Earlier the American Petroleum Institute also reported a 5.2 million bbl drop in US crude stocks but to a lower level of 348.6 million bbl. It said gasoline inventories were down 1 million bbl to 211.2 million bbl, while distillate stocks lost 558,000 bbl to 150.2 million bbl.

EIA officials said imports of crude into the US dipped by 34,000 b/d to 9.1 million b/d last week. In the 4 weeks through Aug. 5, US crude imports averaged 9.4 million b/d, down by 696,000 b/d from the comparable period in 2010. Gasoline imports last week averaged 633,000 b/d while distillate fuel imports averaged 99,000 b/d.

The input of crude into US refineries increased 135,000 b/d to 15.6 million b/d last week with units operating at 90% of capacity. Gasoline production increased to 9.5 million b/d, while distillate production decreased to 4.5 million b/d, EIA reported.

Energy prices

The September contract for benchmark US light, sweet crudes dropped $2.01 to $79.30/bbl Aug. 9 on the New York Mercantile Exchange. That specific contract hit a new lifetime low of $75.71/bbl in intraday trading that also saw sales as high as $83.05/bbl. The October contract also hit a lifetime low of $76.15/bbl before closing at $79.67/bbl, down $2.03 for the day. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.01 to $79.30/bbl.

Heating oil for September delivery declined 3.69¢ to $2.76/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.4¢ to $2.67/gal.

The September natural gas contract, however, gained 5.9¢ to $3.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 3.9¢ to $4.06/MMbtu.

In London, the September IPE contract for North Sea Brent retreated by $1.17 to $102.57/bbl. Gas oil for August fell $14 to $886.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dropped 84¢ to $101.53/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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