MARKET WATCH: Crude oil futures price jumps 4% in New York market

In one of the strongest showings this year, the front-month contract for benchmark US crude jumped more than 4% Oct. 24 in the New York market, moving into backwardation with subsequent monthly contracts priced sequentially lower and the current December contract $1/bbl higher than that for December 2012.

The price jump for West Texas Intermediate outpaced gains for North Sea Brent, reducing the Brent-WTI spread to $20.18/bbl at the close of the New York trading session—“the narrowest level since July 28,” said analysts in the Houston office of Raymond James & Associates Inc.

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, “Oil traded at the highest level in 12 weeks on expectations of rising US demand and speculation that European Union leaders would reach agreement on the structure of the European Financial Stability Facility (EFSF).”

Some attributed the price increase at least partially to the favorable Chinese Purchasing Managers Index (PMI) report Oct. 24. However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “They will have to explain why Brent did not move as much and why the landlocked contract was leading the show. Backwardation seeking flows were behind the strength in WTI yesterday, and we have no element at hand to be sure that those flows have already been exhausted. The resistance of the 100-day moving average has been broken, and now WTI can aim at the convergence of $95/bbl with the 200-day moving average.”

If the latter moving average is broken, Jakob said, “Then we can face the risk of some delta-hedging buying on the very large layers of call options at $100/bbl for WTI. The surge in WTI has prevented the negative cross-over of the 5- to 9-day moving average and WTI is not yet in the overbought territory of the RSI-14 [Relative Strength Index over a 14-day period]. On WTI, we draw a first resistance at $93/bbl, but the real test is at $95/bbl. First support is at $90.20/bbl, then $89/bbl.”

He said, “Despite the correction in the Brent premium to WTI, the spread remains very high and with some further weakening of the reformulated blend stock for oxygenate blending backwardation, the RBOB cracks to Brent are under extreme pressure and again at risk of hitting a negative number. If flows continue to be attracted to crude oil for the backwardation, we will not exclude that in the process RBOB goes below Brent.”

If that occurs, he said, “Those Sunoco Inc. refineries on the East Coast will probably not wait [until] July to shut down. If the RBOB crack to Brent goes into the red, then the RBOB crack to Light Louisiana Sweet crude goes deeper into the negative.”

In other news, the euro was stronger, but the Markit Group Ltd.’s PMI numbers for Europe were below expectations and at the lowest level since 2009. “With Europe in desperate need of some boost to growth and with Standard & Poor’s having warned that it will probably have to downgrade France if it falls into recession, we have to wonder how long will the European Central Bank resist cutting its current interest rates; which would be negative for the euro,” Jakob said.

Meanwhile, he said, “In Greece, the tax bills are apparently not being sent out anymore given that the company supplying the ink has not been paid. Not to worry, the ministry hopes to sign a new contract before the end of the year.”

Oil market outlook

Analysts at Barclays Capital Commodities Research reported, “Oil, like most markets, seems to be trading in a maelstrom of information where any headline is immediately subjected to opposite and contradictory interpretations, with unpredictable consequences for prices. However, what does stand out in the oil market is the urge for prices to constantly break higher, despite the severe pressure from macro shorts that has engulfed most risk assets and oil in particular, given that its decline has been far less relative to other commodities and assets.”

The primary reason for that, they said, is “extreme tightness in physical markets and fundamentals that are screaming for higher prices. The softness in demand has been temporary so far, with weakness in one month swiftly reversed in the next. Even demand within the Organization for Economic Cooperation and Development (OECD) is looking perkier. The supply deficit, though, has continued to grow, with non-OPEC performance showing no signs of improvement and a myriad of geopolitical issues affecting both oil supply and policy within the Organization of Petroleum Exporting Countries. Reflecting this mismatch, all crude benchmarks (including WTI) are in backwardation, and OECD inventories are now well below their 5-year average, despite the addition to the market of a significant amount of strategic stock holding.”

Barclays Capital analysts said, “The oil market tightening that started in Europe and Japan has now spread to the US, with US crude and oil product inventories having fallen at a rate of nearly 1 million b/d over the past month and currently standing below the 5-year average after 3 long years. The determination of key producers to defend $90-100/bbl crude makes the downside limited, while the fundamentals create an upside potential that is far more unlimited. Naturally, the current path of least resistance for prices is still upwards and until the global market remains in a deficit, the current debt crisis can temper but not derail that momentum, unless of course a complete policy impasse is reached.”

Energy prices

The December contract for benchmark US sweet, light crudes jumped $3.87 to $91.25/bbl Oct. 24 on the New York Mercantile Exchange. The January contract escalated by $3.67 to $91.14/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.70 to $91.10/bbl as it struggled to get in step with the front-month futures contract price.

Heating oil for November delivery increased 3.71¢ to $3.05/gal on NYMEX. RBOB for the same month inched up 0.42¢ to $2.69/gal.

The November natural gas contract declined 2.5¢ to $3.60/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 8.8¢, also to a rounded closing price of $3.60/MMbtu.

In London, the December IPE contract for North Sea Brent gained $1.89 to $111.45/bbl. Gas oil for November lost $3 to $952.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased 80¢ to $109.11/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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