MARKET WATCH: Energy prices fall as market worries are resurrected

Energy prices fell generally across the board Sept. 28, in most cases giving back most of or more than the price jumps of the previous trading session.

“The [equity] market halted its 3-day winning streak as concerns mounted that Europe's policymakers may not be up to the task in dealing with the debt crisis,” said analysts in the Houston office of Raymond James & Associates Inc. Standard & Poor’s 500 index “reversed course from earlier gains to end the session down more than 2%, while West Texas Intermediate fell more than 4% and natural gas dropped just under 2%,” they said. “Energy stocks underperformed the broader market with the Oil Service Index and [SIG Oil Exploration & Production Index] EPX each down 5%.”

At Pritchard Capital Partners LLC, New Orleans, research analysts said, “As this terrible quarter for exploration and production and oil service stocks mercifully comes to a close, we cannot help but think a big reason for the recent weakness beyond the everyday headlines, particularly yesterday, is that many investors are purging their portfolios of stocks they do not want to have on their books at the end of the quarter. There were quite a few stocks beaten down during the quarter.”

Markets were up slightly in early trading Sept. 29 although oil and gas prices remained flat after Germany's lower house of parliament voted overwhelmingly to increase the European Financial Stability Facility (EFSF) bailout fund to €211 billion from €123 billion. However, the expected approval came only after a sharp debate that outlined divisions over Germany’s role as Europe's economic power.

“The way the European headlines are being traded these days, this will probably be taken for a little while as another ‘Europe is saved’—until the next European headline,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

He said, “Yesterday oil was weak, but it was a cross-commodity sell-off rather than just an oil affair. The problem with commodities as an asset class for ‘diversification’ purposes is that when the redemptions start to kick-in, the selling occurs irrespective of each commodity supply and demand. If funds are hit with redemption request then crude oil could find itself in a precarious position given that WTI is back (like in October 2008) to being a short distance away from the large layers of options puts on the WTI December contract.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, observed, “Euro-zone consumer confidence for September has fallen further, to the lowest level since September 2009, and Japan retail sales (August) are also much weaker than expected.” For now, he said, “We expect the oil price to come under continued pressure from weak economic growth and a deteriorating financial market. Refining margins will have a short-term boost from the partial shut-down of the Shell refinery in Singapore, before other refineries ramp up throughput to fill the void.”

Royal Dutch Shell PLC is in a 2-day process of shutting down its 500,000 b/d Singapore refinery because of a fire that started Sept. 28 and was still burning early Sept. 29, Reuters news service reported.

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, reported, “The oil market remains caught between two competing and intensifying influences. Outside the oil market, the probability of a major economic policy failure and associated economic discontinuities has grown. Likewise, within the oil market, spare capacity has eroded and physical market strength has grown following a large supply deficit in the third quarter.”

He said, “While the risks of economic discontinuity are growing, it remains a residual 15-20%. Given that the base case economic scenario still involves the 80-85% chance [that] economic policy failure is avoided, we see no requirement for the reexamination of price dynamics just yet. In the base case of economic continuity, there is nothing in current demand and supply dynamics, in the pace of the likely return of Libyan oil, or in the Organization of Petroleum Exporting Countries’ policy response that would lead us to make huge changes to oil price forecasts just for the sake of it.”

US inventory

The Energy Information Administration reported Sept. 29 the injection of 111 bcf of natural gas into US underground storage in the week ended Sept. 23, exceeding the Wall Street consensus for a gain of 103 bcf. That increased working gas in storage to more than 3.3 tcf, down 91 bcf from the volume in the comparable period last year but 5 bcf above the 5-year average.

Earlier, EIA said commercial US crude inventories increased 1.9 million bbl to 341 million bbl in the week ended Sept. 23, just above average for this time of year but short of Wall Street’s consensus for a 2.1 million bbl gain. Gasoline stocks were up 800,000 bbl to 214.9 million bbl, also above average but short of market expectations of a 1 million bbl increase. Finished gasoline inventories remained unchanged while blending components inventories increased last week. Distillate fuel inventories rose 100,000 bbl to 157.7 million bbl, contrary to analysts’ consensus for a 400,000 bbl decrease (OGJ Online, Sept. 28, 2011).

Overall, the latest EIA report of oil inventories “was in line with consensus, as smaller-than-expected builds in crude and gasoline were offset by an unexpected build in distillates. Despite the overall build in crude, inventories at Cushing, Okla., fell by 1 million bbl, marking the 9th straight week of draws,” Raymond James analysts said. “The demand picture remains lackluster, with total petroleum demand relatively flat week-over-week and down 2.4% year-over-year on a 4-week moving average basis.”

Energy prices

The November contract for benchmark US sweet, light crudes dropped $3.24 to $81.21/bbl Sept. 28 on the New York Mercantile Exchange. December contract retreated $3.22 to $81.46/bbl. On the US spot market, WTI at Cushing was down $3.24 to $81.21/bbl.

Heating oil for October delivery decreased 5.82¢ to $2.82/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 4.48¢ to $3.76/MMbtu.

The October contract for natural gas fell 6.8¢ to $3.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 4.2¢ to $3.88/MMbtu.

In London, the November IPE contract for North Sea Brent lost $3.33 to $103.81/bbl. Gas oil for October inched up 75¢ to $907.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes declined 19¢ to $104.34/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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