MARKET WATCH: Crude oil price rebounds; winter prospects lift gas prices

The front-month crude oil contract rebound Oct. 14, wiping out losses from the previous 2 days to challenge market resistance at $87/bbl in New York, while natural gas rallied 5% on the prospects of colder weather and short covering.

“Crude oil finished last week on a firm footing, due to expectations of a positive G-20 [the group of 20 finance ministers and central bank governors established in 1999 to discuss key issues in the global economy] meeting [over the weekend], but also due, in part, to contract expiry,” said Leon Westgate at Standard New York Securities Inc., the Standard Bank Group. “The Brent-West Texas Intermediate spread has widened once again, trading out to $25.50/bbl. With broader macroeconomic themes continuing to dominate, however, flat prices are again tracking the euro and other exogenous factors.”

Westgate reiterated, “Overall, the oil market remains in a tug of war between tight physical fundamentals and significant uncertainties in the wider financial markets about sovereign risks and the knock-on impact on demand. The consequence is likely to be continued price volatility while this tug of war plays out. Price-wise, it’s worth noting that both WTI and Brent remain range-bound, occupying an albeit fairly broad $16-17/bbl trading range since early August. In that regard, it seems that a significant change in the macroeconomic picture is needed before we see a major shift in price.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The flat price of crude oil over the last 20 days has been trading in an environment of extreme correlation levels to the benchmarks of the euro vs. the US dollar and of the Standard & Poor’s 500 Index. We think that the value investors are on the sideline and are waiting to see what comes out of the Euro-zone and the [next] G-20 meeting and are leaving more of the global market making to the computers, hence the current high level of correlation. While the rebound in the euro can be seen as a sign of renewed confidence in Europe, Deutsche Bank has an interesting theory that it could be linked to US denominated asset sales by European banks. If that was true, then the correlation machines are sending buy orders on equities and oil for the wrong reasons.”

Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, said, “Oil prices recovered more than 10% [last] week after a plunge in North Sea Brent futures [the previous] week to within a whisker of $100/bbl. It has not taken a lot to rev prices higher again. An alleged Iranian plot to kill Saudi Arabia's ambassador to the United States frothed up a market that had already been buoyed by signs that the European Union had (yet another) plan to avert a debt default by Greece. A force majeure in Nigeria and slightly better economic data from the US and the Euro-zone supported sentiment.”

They said, “Despite signs of tighter stocks as we enter the maintenance season, it looks like the underlying story of sluggish demand growth goes on. In the US, credit-card data shows gasoline demand 2.5% lower than at the same time last year, while the 4-week average fell for the 29th consecutive week, due to high prices. As for Greece and the euro, we repeat what may by now sound more like a mantra: deciding whether to deliver the next tranche of loans to Greece is very different from solving the European debt crisis. Given the time it has taken Europe’s leaders to deliver a band-aid for this minor scratch, it may take an age to organize first aid for the gaping hole in European budgets. Even if this is managed, the economic pain will continue, as it will force a prolonged period of austerity. Not surprisingly, this week we saw the International Energy Agency joining OPEC and the US Energy Information Administration in revising lower their 2011 oil demand growth forecasts, because of slowing economic growth.”

Jakob said, “While the very strong price rebound over the last 10 days is described by some as renewed confidence in the economy, the position reports are showing that it is mainly short covering that has been behind the price rebound. The last 3 weeks have been dominated by large speculators by trading on the short side (first by adding fresh short positions, then by covering those shorts). The position reports [as of Oct. 11, the close of the Commodity Futures Trading Commission’s latest data] are not indicating that large speculators are adding to the long side and therefore that will put the current price rebound at risk when the short covering dynamics start to ease. Furthermore, we note that the commercials have been using the price rebound to add aggressively to the short side on Brent.”

He said, “Given that the price rebound has been driven by short covering and that there is still a lot of incertitude on the ability of the Europeans to come up with a miracle solution, we are not comfortable holding length in Brent at demand destruction levels. The speculators on the short side have panicked, but the speculators on the long side are still holding significant long positions in crude oil; therefore, they will not be able to afford another European disappointment.”

G-20 results

Bloomberg news service reported monetary officials at the weekend G-20 meeting in Paris gave European leaders a week to settle differences and establish a strategy to terminate their sovereign debt crisis, warning failure to do so would endanger the world economy. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

The meeting did not produce “anything of substance,” Jakob said, however. “The dollar index was sharply lower during the week, with the euro rising back towards a test of resistance at 1.40 [against the dollar]. The Euro-zone ministers will have to come up with something big at their [next] meeting. Japan has warned that it could intervene again to weaken the yen,” he said.

Also, Jakob reported, “The Occupy Wall Street protests are not yet dying down. Maintaining them during winter will be harder, and while we do not want to overplay those protests, we also have to recognize that the size of the crowds on Oct. 15 in New York City was large in a US context. What we find troubling is that ‘civil unrest’ was described more than a year ago as a probable development of the failure of western governments to deal with the economic crisis, and the global Twitter and Facebook street revolts are inputs to consider that were not there in 2008. Greece should see some increasing strikes during the week (including a strike, of course, by the tax collectors).”

Westgate said Oct. 17, “With hopes of a European resolution being eroded by comments from Germany this morning, the market is feeling nervous once again. Comments from China’s sovereign wealth fund saying European banks must be more transparent before investment can be considered have also done little to improve the mood, suggesting that the cavalry and any potential rescue is still some way away.”

In Houston, Raymond James analysts reported, “Just another merger Monday with Kinder Morgan Inc. acquiring, El Paso Corp., and Statoil ASA acquiring Brigham Exploration Co. [based in Austin, Tex.].” The “abundance” of merger and acquisition activity “begs the question—who's next?” said the analysts.

Offshore outlook

Raymond James analysts said, “The investment community is consumed with debating whether or not North American oil service earnings-per-share (EPS) estimates need to come down (yes, we are still bullish on North America). Meanwhile, the fundamentals for the offshore drillers are quietly improving. We began upgrading the offshore drilling names nearly 3 months ago and are even more confident in the fundamentals today.”

They said, “Keep in mind that over 95% of all offshore activity is driven by Brent type pricing, which has yet to fall below $100/bbl…. Given the improving supply and demand fundamentals in the jack up rig space, we're raising our EPS estimates for the first time in years due to higher dayrate and utilization estimates. While the offshore stocks have recently outperformed relative to US land stocks, we still believe we are in the early stages of a day-rate revival and look for more upside stock performance for this group.”

Energy prices

The November contract for benchmark US light, sweet crudes reclaimed $2.57 to settle at $86.80/bbl Oct. 14 after peaking at $87.49/bbl in intraday trading on the New York Mercantile Exchange. The December contract gained $2.55 to $87/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., remained in step with the front-month NYMEX contract, up $2.57 to $86.80/bbl.

Heating oil for November delivery continued its surge, up 8.44¢ to $3.06/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 6.72¢ to $2.82/gal.

The expiring November natural gas contract jumped 17.2¢ to $3.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 3.8¢ to $3.49/MMbtu.

In London, the November IPE contract for North Sea Brent climbed $3.57 to $114.68/bbl. Gas oil for November shot up $31.25 to $952/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.96 to $109.01/bbl. So far this year, it has averaged $107.13/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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