MARKET WATCH: Fed's gloomy economic outlook pulls down energy prices

Energy prices resumed their downward trend Sept. 21 after the US Federal Reserve Bank announced its third attempt in 3 years to stimulate the economy, only to see equity prices tumble as it warned the global economy will remain at risk for years. The price drop rippled through Asian markets overnight with equities and energy commodities still in retreat when US markets reopened this morning.

As expected, the Fed said it will implement its “Operation Twist” by selling $400 billion worth of treasury notes that mature within a few years and using that revenue to buy treasury notes that will mature 6-30 years from now. Its strategy is to reduce long-term interest rates—already at record lows—to make long-term loans cheaper for consumers and corporations. 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 (OGJ Online, Sept. 19, 2011).

But then “the Fed's rhetoric became decidedly more bearish, adding, ‘there are significant downside risks to the economic outlook, including strains in global financial markets,’” analysts in the Houston office of Raymond James & Associates Inc. “Spooked by this news, the Standard & Poor’s 500 index sold off into the close, ending down 3%. Even after a bullish inventory report, crude was unable to buck the trend and ended the day in the red, falling 1.1%. Natural gas also followed suit ending the day down 1.3%.” Energy stocks underperformed the broader market with the Oil Service Index and SIG Oil Exploration & Production Index declining 4.6% and 3.5%, respectively.

“It looks like we're in store for another ugly day after disappointing manufacturing data out of both Europe and China (both falling below the 50 mark, signaling economic contraction) this morning,” Raymond James analysts surmised. Even before the New York market opened, the S&P was down 2%, the price of crude dropped 4%, and natural gas declined another 1%.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “It is difficult to portray how an ‘Operation Twist’ could provide significant support to assets.” It may even be “slightly dollar positive,” he said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group observed, “The market ‘sold on the fact’ [of the anticipated action by the Fed] and appeared to be convinced that the Fed has run short of options. There have already been talks of another round of quantitative easing from the Fed. However, there will be plenty of political hurdles. More importantly, the market has grown much more skeptical over the effectiveness of further monetary easing.”

US inventories

The Energy Information Administration reported the injection of 89 bcf of natural gas into US underground storage in the week ended Sept. 16, below the Wall Street outlook for a 92 bcf injection. The latest addition boosted working gas in storage to more than 3.2 tcf, down 129 bcf from the year-ago level and 35 bcf below the 5-year average.

EIA earlier said the US inventory of commercial crude plummeted 7.3 million bbl to 339 million bbl in the week ended Sept. 16, far surpassing Wall Street’s consensus for a 1.3 million bbl draw. Gasoline stocks bumped up by 3.3 million bbl to 214.1 million bbl, above average for this time of year and well beyond the increase of 1.4 million bbl that the market expected. Distillate fuel inventories decreased 900,000 bbl to 157.6 million bbl, opposite analysts’ outlook for a 1 million bbl gain (OGJ Online, Sept. 21, 2011).

Raymond James analysts noted, “Last week ended the release program from Strategic Petroleum Reserves as it reached the targeted 30 million bbl. The demand picture rebounded from [the previous] week, with total petroleum demand rising 2% [in the week ended Sept. 16], down 2.2% year-over-year.” Crude inventories in Cushing, Okla., “fell for the eighth straight week,” they reported.

Concerning the plunge of US crude inventories, Jakob said, “At face value this should be taken on the positive side, but given the deterioration of the product cracks the lower crude stocks need to be weighted with a risk of lower future refining demand. The crude oil stock draw was concentrated on the US Gulf Coast. Tropical Storm Lee had resulted in lost output of 5 million bbl and that can explain part of the low stocks reported” by EIA. But EIA’s divergence from the numbers reported by the American Petroleum Institute for gulf coast storage “is huge,” he said.

In other news, the 4-week average of imports of Saudi Arabian crude into the US was up 320,000 b/d from the comparable period a year ago “and at the highest level since December 2008,” Jakob said.

Imports of crude into the mid-western US, including Cushing, “are also on the high side and trending towards the record high set in June of last year,” he said. “If crude imports are kept at current levels, we expect to see the stocks in Cushing starting to rebuild during the fourth quarter.”

US gasoline stocks “remain comfortable given the poor demand,” said Jakob. However, he said, “The US has relied on exports to balance its distillates supply, and if the global economy continues to cool off, those exports could start to be under pressure.”

Energy prices

The new near-month November contract for benchmark US sweet, light crudes retreated from an intraday high of $87.99/bbl to close the market’s regular session at $85.92/bbl, down $1 Sept. 21 on the New York Mercantile Exchange. The December contract dropped 99¢ to $86.18/bbl. On the US spot market, West Texas Intermediate at Cushing was down 97¢, also closing at $85.92/bbl.

Heating oil for October delivery declined 2.74¢ to $2.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 3.49¢ to $2.67/gal.

The October contract for natural gas fell 6.8¢ to $3.73/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 1.9¢ to $3.80/MMbtu.

In London, the November IPE contract for North Sea Brent retreated 18¢ to $110.36/bbl. Gas oil for October increased $6.25 to $945.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 70¢ to $108.99/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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