Energy prices retreated Sept.9 because of a general lack of direction and without economic solutions forthcoming from political and financial leaders around the world.
“Crude finished the day down 2% in response to both demand concerns and the euro hitting a 6 ½-month low against the US dollar. Natural gas also finished down 1.6%,” said analysts in the Houston office of Raymond James & Associates Inc. Markets still were in a slump in early trading Sept. 12.
“Investors were focused on the G7 [Group of Seven—formed in 1976—of the most industrialized countries: Canada, France, Germany, Italy, Japan, UK, and US] meeting in Marseilles in the hopes of receiving some positive, constructive solutions to help curb both slowing economic growth and the ongoing debt crisis in Europe. Unfortunately, the meeting provided little comfort as the seven finance ministers promised to take the proper steps but offered very few specifics,” Raymond James analysts reported.
“To make matters worse,” they said, “the top German official at the European Central Bank announced his resignation, further highlighting the division within the bank over how to handle the crisis. Domestic stocks took their cue from the news out of Europe with Standard & Poor’s 500 Index closing the day down 2.7%.” The broader market was led lower by the energy sector with the SIG Oil Exploration & Production Index and the Oil Service Index losing 3.8% and 3.5%, respectively.
Oil prices fell as investors continued to avoid financial risk, said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Clearly the market is lacking confidence in policy-makers’ ability to revive the economy despite [President Barack] Obama’s Jobs Act. Oil products fell more than crude, which saw refining margins continue with their recent decline.”
In contrast, he said, “The front-end of Brent structure was sharply higher, with its October-November spread 65¢/bbl firmer than the day before, signaling a very tight physical market. Latest news shows that North Sea crude loading in October is likely to increase by 100,000 b/d, or 5%, [over] September, which is likely to alleviate the tight supply situation to some extent.”
Last week, front-month contracts for West Texas Intermediate and North Sea Brent had net gains of 79¢/bbl and 44¢/bbl respectively. “Much of the gain in oil took place at mid-week, supported by a better-than-expected US non-manufacturing ISM survey and the German Constitutional Court’s support of German participation in the Euro-zone bailout,” Zhang said. “However, oil was sold off towards the end of the week as the market was left unconvinced by Obama’s Jobs Act speech. Over the weekend, the market was hit further by talks of an imminent Greek default and credit downgrade of major French banks.”
Zhang said, “Policy-makers appeared to be downbeat last week, with the ECB retreats from its recent hawkish stance. The market still clings on the hope that the US Federal Reserve Bank will ease further on its Federal Open Market Committee [the Fed’s policy-making arm] upcoming meeting Sept. 21. So far, the Fed chairman has given little away what the likely actions are going to be, if any.”
He reported, “We see the risk to oil remaining on the downside, with the bearish macroeconomic backdrop. With margins coming under pressure for refineries outside [the Midwest] US over the last 2 weeks or so, we see Brent under much more pressure than WTI. As the short-term supply issues are being resolved and [there is] a return, albeit slow, of Libya crude, we see Brent structure to weaken from its record highs in recent days.”
Marc Ground, another analyst with Standard New York Securities, said, “Net speculative length for oil remains unusually high. This leaves the market vulnerable to speculative action.”
Workers began returning Sept. 10 to production platforms in the US sector of the Gulf of Mexico as Tropical Storm Nate turned west to make landfall on the Mexican coast. Reuters news service reported no US production was shut in as a result of that storm. However, oil exports from Mexico to the US were disrupted.
OPEC’s outlook
In its monthly oil market report Sept. 12, the Organization of Petroleum Exporting Countries said the average price of its basket of 12 benchmark crudes fell $5.30/bbl, or 4.7%, in August—“the sharpest decline in percentage terms since May 2010.” OPEC’s basket price remained volatile at $101.20-113.17/bbl during the month, with a sharp drop early in the month before stabilizing and moving higher due to disruptions of North Sea supply and storms that shut in production from the Gulf of Mexico.
As a result of the slowdown of industrial activity in most of the major economies, OPEC lowered its expectation of world economic growth to 3.06% from 3.7% this year and to 3.9% from 4% in 2012. The US is now forecast to grow 1.6% in 2011 and 1.9% in 2012 with the Euro-zone to expand by 1.7% in 2011 and 1.1% in 2012, following poorer-than-expected performance in the second quarter. Japan’s economy is expected to contract by 0.8% in 2011 before expanding 2.5% in 2012.
OPEC lowered its monthly estimate of global growth in oil demand by 150,000 b/d to 1.1 million b/d following a weaker-than-expected summer driving season in the US and the sluggish economic performance among member nations of the Organization for Economic Cooperation and Development. Oil demand in China is weaker than expected in the “typically peak-demand” third quarter, OPEC reported.
It expects non-OPEC oil supply to grow 500,000 b/d this year, a decrease of 80,000 b/d from its previous estimate. Demand for OPEC crude this year is estimated at 29.9 million b/d, down 1 million b/d from the previous report. Next year, it expects demand for OPEC crude to average 30 million b/d.
Meanwhile, Maria van der Hoeven, a former Dutch economy minister who early this month succeeded Nobuo Tanaka as executive director of the International Energy Agency, said that group in the future will release emergency oil reserves only in the case of a supply disruption and not to help the economy or lower prices.
Some OPEC member nations were upset by the IEA’s June decision to release to the commercial market 60 million bbl of crude and petroleum products from compulsory government stocks, only the third time for such an emergency move. “The decision to tap the reserve was taken in the wake of the loss of Libya's oil exports, but the belated response, which coincided with a break in oil prices to around $120/bbl, led some to suspect that stocks might be used in the future to proactively influence the market,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC.
Van der Hoeven recently met with OPEC Secretary General Abdullah al-Badri and intends to foster her agency's relationship with OPEC and emerging markets, the analysts said.
Energy prices
The October contract for benchmark US light, sweet crudes declined $1.81 to $87.24/bbl Sept. 9 on the New York Mercantile Exchange. The November contract lost $1.82 to $87.41/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.81 to $87.24/bbl.
Heating oil for October delivery decreased 5.85¢ to $2.99/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 11.41¢ to $2.77/gal.
The October contract for natural gas was down 6.5¢ to $3.92/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 2.7¢ to $3.96/MMbtu.
In London, the October IPE contract for North Sea Brent lost $1.78 to $112.77/bbl. Gas oil for September fell $27.50 to $939.50/tonne.
The average price for OPEC’s basket of 12 benchmark crudes was down $1.75 to $110.40/bbl. So far this year, OPEC’s basket price has averaged $107.39/bbl.
Contact Sam Fletcher at [email protected]
