MARKET WATCH: Market fears continue to tumble energy prices

Energy prices continued falling although at a slower rate Sept. 23 with markets still cautious amid signs of a worsening economic crisis.

A weekend meeting of the Group of 20 (G-20) “provided moral support” but no solutions to the Euro-zone sovereign debt crisis, said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Facing these uncertainties, the US dollar strengthened vs. most other major currencies, except the yen, which has weighed on most dollar-denominated commodities,” he said.

“The economic crisis of 2011 has not yet reached the same peaks as in 2008, but the warning signs are plentiful and this continues to create an environment where cash needs to be king,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Given the general poor state of the economic matrix and the declining outlook for oil demand growth, we continue to view Brent crude oil at S104/bbl as an expensive commodity; we clearly do not think that the conditions are in place for a sustained drive to $130/bbl.”

Crude priced above $100/bbl has had the same impact on the global economy now as in 2008, he said. In London, the November IPE contract for North Sea Brent lost $1.52 to $103.97/bbl on Sept. 23. But at that price level, Jakob said, “We will have to wait before any meaningful cut from Saudi Arabia.”

‘Better prepared’

Jakob said, “The main difference to 2008 is that the global institutions are today a bit better prepared and can therefore react a bit more proactively.” He said. “Comments on a Greek default have changed over the last 10 days from ‘no chance’ to ‘we will be ready and organized for it.’”

The European Central Bank is now concentrated on recapitalization of European banks “to allow them to better handle the Greek default when it is finally triggered.” Jakob said, “This will not necessarily happen this week or next, but it is clear that everything is being set-up for that option and public opinion is also getting readied for it. The problem, however, is that in such an environment it is difficult to plan for everything, and the odds of something not going according to plans are not low.”

Meanwhile, a strike by transportation workers in Greece over new austerity measures created an hours-long gridlock Sept. 26. The Greek government was forced to impose the austerity measures to secure the next €8 billion ($10.7 billion) installment of bailout loans from the €110 billion rescue package. The Associated Press reported Greece has only enough funds to see it through mid-October, when it faces default.

In other news, the US Department of Commerce said Sept. 26 that sales of new homes fell 2.3% to a 6-month low in August. It was the fourth consecutive monthly decline during the peak-buying season, indicating that the housing market is years away from a recovery, AP reported.

Under these poor economic conditions, Jakob said, businesses will not mount a massive recruitment or expansion drive. “This is then a negative for growth and a reason why it starts to be better to organize the default of Greece rather than just kick the can again and again,” said Jakob.

With businesses moving to “ring-fence” their operations “for possible more challenging times in the next 6 months,” Jakob said, “It is also logical for investors to ring-fence their exposure. The experience of 2008 shows that in such instances investors not only cut their losses but they also cash-in on the profits, causing therefore a global deleveraging. This is a risk that we need to fully consider, especially this week as we come to the end of the quarter.”

Energy prices

The November contract for benchmark US light, sweet crudes declined 66¢ to $79.85/bbl Sept. 23 on the New York Mercantile Exchange. The December contract decreased 63¢ to $80.12/bbl. On the US spot market, WTI at Cushing, Okla., was down 66¢ to $79.85.

Heating oil for October delivery retreated 5.27¢ to $2.80/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped by 0.53¢ to $2.55/gal.

The October contract for natural gas dipped 0.4¢ to $3.70/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 1.1¢ to $3.75/MMbtu.

In London, the November IPE contract for North Sea Brent lost $1.52 to $103.97/bbl. Gas oil for October dropped $4.75 to $899/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes fell 74¢ to $104.37/bbl. So far this year, OPEC’s basket price has averaged $107.42/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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