MARKET WATCH: Energy prices continue intermittent downward spiral

Energy prices generally continued their intermittent downward spiral as the dollar strengthened against the euro, with front-month crude dropping 2% Sept. 16 to wipe out its small gain in the previous session of the New York market.

“Natural gas posted a 1% loss building on the momentum of the bearish Energy Information Administration inventory report [issued Sept. 18] and forecasts for milder temperatures,” said analysts in the Houston office of Raymond James & Associates Inc. The SIG Oil Exploration & Production Index ended flat for the day while the Oil Service Index posted a 1% loss “as the drop in crude pressured the respective indices,” they said. Broader markets and crude prices were down in early trading Sept. 19 with natural gas “marginally lower.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said oil prices edged lower as US consumer confidence remained weak. “Oil products fared slightly better than crude, which saw refining margins improve by around $1/bbl in Europe. Brent’s term structure ended the day broadly unchanged after some intraday rallies,” he reported.

Raymond James analysts noted, “Last week investors were listening to the leaders in the Euro-zone buoyed by hopes that a resolution to the debt crisis would emerge.”

US Treasury Secretary Timothy Geithner attended the Sept. 16 meeting of European finance ministers “to tell Europe how they should do it, and he received a cold shoulder (we are being very diplomatic),” said Olivier Jakob at Petromatrix in Zug, Switzerland. He added, “The Greek Prime Minister was supposed to travel to the US this weekend, [but the] trip was cancelled at the last minute at the London stop-over and [made] a U-turn back to Greece. Separately, the latest opinion polls show 66% of the Germans and 68% of the French are against providing a new bail-out to Greece.”

Jakob warned, “The political cacophony in Germany about Greece is not slowing down, and it its quite clear that we should not write-off the risk premium for Greece just because a video conference is organized between German Chancellor Angela Merkel and French President Nicolas Sarkozy.” On Sept. 16, Moody's Investors Service confirmed it could still downgrade Italy’s credit rating within the next month.

Meanwhile, Jakob said, “Merkel suffered a setback at local polls over the weekend, and it seems that Germany is getting tougher on what it asks of Greece: having a plan for more tax collection in the future does not fly anymore as there is little trust that such measures will be truly implemented; the Greek budget needs to be balanced through higher cuts in spending.”

He said, “This week will be all about the US Federal Reserve’s open market committee [the Fed’s policy-making arm] meeting and the decision they take or don’t take. The consensus is for an ‘Operation Twist,’ although how it would really have an impact on global assets is very unclear to us as it would not be the same liquidity operation that QE2 [the second phase of the Fed’s quantitative easing program] was.”

Named for the popular Twist dance in 1961 when that plan originated, it is intended to flatten the yield curve, promote capital flow, and strengthen the dollar by using open market operations to shorten the maturity of the public debt. It generally was considered a failure at that time but has since been resurrected.

“One way or another, the US Federal Reserve should be the creator of substantial volatility in the second part of the week,” Jakob cautioned. Meanwhile, President Barack Obama’s plan to raise taxes on capital gains “could be stock market negative.” However, Jakob said getting through the Republican-controlled House “anything that originates in the White House a year before the next elections” is unlikely.

Energy prices

The October contract for benchmark US light, sweet crudes dropped $1.44 to $87.96/bbl Sept. 16 on the New York Mercantile Exchange, obliterating its 49¢/bbl gain from the previous session. The November contract lost $1.41 to $88.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.44 to $87.96/bbl.

Heating oil for October delivery declined 1.57¢ to $3.01/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month continued inching up with a 0.13¢ increase, yet closed essentially unchanged at a rounded $2.78/gal.

The October contract for natural gas kept falling, down 6.9¢ to $3.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 17.4¢ to $3.82/MMbtu.

In London, the November IPE contract for North Sea Brent dipped 8¢ to $112.22/bbl. Gas oil for October was down $1.75 to $950.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated by $1.11 to $110.69/bbl. So far this year, the OPEC basket price has averaged $107.43/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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