MARKET WATCH: Crude oil prices advanced modestly in mixed market

Oil prices advanced modestly but other energy commodities were down Oct. 7 in “choppy” trading due to continued chaos in the world economy.

“Gasoline and middle distillates cracks weakened after a strong rally during the past week on refinery closures,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Shell is starting up its refinery in Singapore, which is to weigh further on product cracks and refining margins. The term structures of Brent and West Texas Intermediate were firmer again on declining Cushing, Okla., inventories and an outage at Total’s Elgin-Franklin field in the North Sea.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The flat price of crude oil remains highly correlated to the Standard & Poor’s 500 index and that was again extremely visible [Oct. 7] after the release of the [weekly report of ] nonfarm payrolls. From pension funds to speculative traders, all we hear is complaints about the correlations. It is an issue that is not addressed, but in our opinion it is something that will turn into a greater and greater problem.”

On Oct. 7, the US Department of Labor reported the “better-than-expected” addition of 103,000 US jobs in September. However, unemployment is still at 9.1%.

Jakob said, “The US nonfarm payrolls were slightly above the average forecasts and if July and August were revised higher, the overall number remains too low to translate into any improvement in the unemployment level. If the computers were blowing up fuses bidding up the market [in technical trading] on the ‘better than expected’ numbers, the White House did not even try to spin a positive tone to those numbers.”

He said, “With around 150,000 people entering the labor force each month, the nonfarm payrolls need to show much stronger additions; otherwise the unemployment level will not drop. At 9.1% it did not change during the month and has been about unchanged throughout the year. The unemployment level both in Europe and in the US is not moving lower. Given that the Atlantic Basin is officially out of the recession, the numbers are confirming more and more that we are in a jobless ‘recovery.’”

Meanwhile, US consumer credit numbers for August released Oct. 7 showed a “totally unexpected” decline—“the largest monthly drop since April 2010,” said Jakob. “Bottom line for the Atlantic Basin: unemployment is not improving while consumers continue to pay historically high levels for transportation fuels and will pay the highest bill ever for heating oil fuel this winter.”

As for the European crisis, he said, “For the last 3 months the situation has trended worse rather than better. The head of the International Monetary Fund mission to Greece claimed over the weekend that the country is ‘going two steps forward and one backwards,’ and if there has been mentions of a leveraged European Financial Stability Facility (EFSF), it is quite clearly because it is becoming obvious that the EFSF will not be enough; especially if France also wants to use it to recapitalize its banks (not to mention Italy).”

Intesa Sanpaolo SPA (ISP), Italy's second-biggest lender, reported last week the financially troubled Dexia SA bank was among those with the best results in the earlier “stress test” by the European Banking Authority. Now Dexia is to be nationalized and its “bad bank” deals taken over by guarantees from Belgium (60%), France (36.5%), and Luxembourg.

The euro was down Oct. 7 after Fitch Ratings downgraded Italy's sovereign credit rating by one notch to A+ from AA- and Spain’s by two notches to AA- from AA+. Belgium was put on downgrade review by Moody's Investors Service. Fitch is the third ratings agency to downgrade Italy in recent weeks following similar moves by S&P and Moody's.

“The euro tried to move back above the 1.35 level, but the late downgrades prevented such a close,” said Jakob. “The Swiss Franc was weaker during the week, not only to the dollar but also to the euro.”

In a more optimistic report, Zhang said, “Net for last week, front-month WTI and Brent gained $3.78/bbl and $3.12/bbl, respectively. The market was boosted by support from central banks and progress in tackling the Euro-zone debt crisis. Furthermore, the economic data from the US mostly exceeded market expectations; although the data still points to a soft growth, fears of an imminent recession have somewhat retreated.”

He said, “The market’s attention will remain focused on the Euro-zone in tackling the debt crisis. Meanwhile, in the physical market, the chairman of Libya’s National Oil Co. told the press that Libya’s oil production has reached 390,000 b/d, which is greater than what the market has expected, and should provide some relief to the very tight physical market. For now, we expect the flat price of oil to continue to be swung by macroevents, while the structure remains firm on tight supplies.”

In other news, China cut retail fuel prices over the weekend by 3.5% and 3.9% for gasoline and diesel, respectively, following decline of oil prices in the international market. “This should help with the heated inflation in China,” said Zhang. “Across the Pacific, US retail gasoline prices have fallen from over $4/gal at the beginning of May to slightly below $3.50/gal last week, a 12.5% drop measured by the average price of all grades of retail gasoline in the US reported by the Department of Energy. The decline in the oil price should provide some support to revive the economy.”

US government offices and the US bond market closed Oct. 10 for the Columbus Day holiday.

Energy prices

The November contract for benchmark US light, sweet crudes traded at $81.27-84/bbl during the Oct.7 session of the New York Mercantile Exchange before closing at $82.98/bbl, up 39¢ for the day. The December contract gained 37¢ to $83.17/bbl. On the US spot market, WTI at Cushing was up 39¢ to $82.98/bbl.

Heating oil for November delivery dipped 0.23¢ but closed essentially unchanged at a rounded $2.86/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.84¢ to $2.65/gal.

The November contract for natural gas fell 11.7¢ to $3.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 1.5¢ to $3.38/MMbtu.

In London, the November IPE contract for North Sea Brent increased 15¢ to $105.88/bbl, but contract prices for subsequent months were down. Gas oil for October climbed $18.25 to $896.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.59 to $103.22/bbl. So far this year, OPEC’s basket price has averaged $107.14/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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