MARKET WATCH: Energy prices plunge as investors flee from risks

Markets dropped energy prices like hot rocks in a Sept. 22 “flight from risk” with crude plunging an awesome 6.3% in the New York market as weakening Chinese manufacturing data exacerbated the global economic concerns.

“Natural gas fared better, only giving up 0.7%. The Oil Service Index and SIG Oil Exploration & Production Index (EPX) were tagged with a 6.5% and 7.6% decline, respectively,” said analysts in the Houston office of Raymond James & Associates Inc.  The Dow Jones Industrial Average fell 3.5% and, along with crude, was down further in early trading Sept. 23.

Yesterday’s market chaos mimicked the Sept. 22, 2008, oil price collapse, prompting Olivier Jakob at Petromatrix in Zug, Switzerland, to warn, “The battle for survival at $80/bbl for West Texas Intermediate is back.” He said, “We are again knocking on the price level where the downside price pressure can accelerate if broken.”

Jakob said, “The $80/bbl WTI price level was well defended in August and will need to be again; the problem, however, is that the global picture has deteriorated further over the last 30 days.”

Meanwhile, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, sees “a clear disconnect between the financial markets and what we continue to hear in real time about the relative strength of end market demand across a wide cross-section of the US economy.” Deutsche Bank analysts said US auto sales continue to climb; one of the largest temporary staffing companies in the US is placing temporary workers at an accelerating rate; advertising spending remains strong; and many retailers and manufacturers “report no signs of a slowdown in sales.”

Sieminski said, “There has been some weakness in inventories held along supply chains. Our US economics team observes that despite frail economic growth in the first half of the year, corporate profit growth remains healthy, indicating that recession may not be imminent despite the gloom in the markets. Corporate profits have continued to grow year-over-year for the past eight quarters since turning positive in the third quarter of 2009. Furthermore, yesterday's Conference Board leading indicators index gained 0.3% in August, building on a positive trend and beating consensus expectations.”

He said, “This corroborates an analysis undertaken by our equity research team on credit conditions in the US that turned positive and suggest upside risks to growth. Although this goes against current market sentiment, credit impulse analysis would suggest upside risks to the US economy, downside risks to the Euro-zone, and what had been upside to credit growth in China has turned to become more balanced. The implication for commodities is that the US equity market trends may become supportive for energy and industrial metal prices as the fourth quarter unfolds.”

Possible bright spot

One positive result of the Sept. 22 market plunge is that it “might just add to more urgency for policymakers to take more decisive actions, particularly for the Euro-zone,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Separate meetings of International Monetary Fund-World Bank officials on Sept. 23 and of the Group of 20 (G20) over the weekend “will be widely watched,” he said.

G20 is comprised of finance ministers and central bankers from the 20 largest economies, including the US and China. In a communique issued the evening of Sept. 22, the group said they “take all necessary actions to preserve the stability of banking systems and financial markets,” according to a Reuters news service report.

“There is a possibility that the Euro-zone will take some action in the next few days, such as to recapitalize banks in the region, which could arrest the market decline temporarily and put bids to risky assets again,” said Zhang.

Meanwhile, he said, “The market is likely to be subdued today ahead of the weekend and after the broad-based risk aversion move so far this week. Current uncertainties in the market [are] not set for buying on dips or taking on short-risk positions, even though there might be a chance that Euro-zone policymakers surprise the market on the upside in the short-term. A bullish view towards the short-term oil market can be justified to some extent by low inventories and supply disruption, but we believe that view should be expressed through term structures, rather than flat prices.”

Energy prices

The November contract for benchmark US light, sweet crudes floundered between $79.66-85/bbl Sept. 22 on the New York Mercantile Exchange before closing at $80.51/bbl, down $5.41 for the day. The December contract fell $5.43 to $80.75/bbl. On the US spot market, WTI at Cushing, Okla., was unusually quick to match the price of a new front-month futures contract; it also was down $5.41 to $80.51/bbl.

Heating oil for October delivery dropped 8.57¢ to $2.85/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 10.65¢ to $2.56/gal.

The October natural gas contract declined 2.5¢ to $3.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 6.2¢ to $3.73/MMbtu.

In London, the November IPE contract for North Sea Brent took a serious fall of $4.87 to $105.49/bbl after shrugging off minimal declines in recent weeks while maintaining a large premium over WTI. Gas oil for October plunged $41.50 to $903.75/tonne.

The Goldman Sachs Group Inc. recently reiterated its prediction the front-month North Brent crude contract will climb to $130/bbl within the next 12 months.

However, Jakob said Sept. 23, “Even after the recent flat price correction, we continue to see Brent as one of the most overbought, overpriced assets. From the current economic base, having Brent rise to $130/bbl over the next 12 months will result in our opinion in something more serious than a double-dip [recession]; hence for the passive investor who is convinced about the $130/bbl-Brent-in-12-months scenario we think it would be better to be in cash than having the portfolio ‘protected’ with a 5% allocation to commodities.”

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $3.88 to $105.11/bbl.

Contact Sam Fletcher at

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