MARKET WATCH: Crude oil prices fall as markets again turn pessimistic

Crude oil prices again fell Oct. 19, along with hopes for resolution of the European economic crisis as demonstrators turned violent outside the Greek parliament in Athens during a general strike in protest of the government’s austerity program.

“France and Germany are still at odds over how to put out the ‘Greece fire,’ which is turning violent and quickly getting out of control. Hopefully a resolution comes pretty quickly as Greece estimates they will have ‘burned’ through their cash by mid-November,” said analysts in the Houston office of Raymond James & Associates Inc. The Greek strike and riots continued Oct. 20.

Markets are in a pattern of almost daily reversals based on news from Europe and other trouble spots.

Today, National Transitional Council officials reported Libyan dictator Moammar Gadhafi was killed in battle as revolutionary forces took Sirte, his hometown and one of the last pockets of resistance by regime loyalists. Details of his death were not immediately available.

While Gadhafi’s demise could negate a prolonged insurgency by loyalists similar to that in Iraq, analysts at Barclays Capital Research said his death “changes very little in the underlying dynamics” of Libya’s oil industry.

“Serious security challenges persist in Libya that could hinder efforts to restore Libyan production fully,” they said. “Divisions within the rebel ranks are undermining efforts to craft a coherent interim government.” As a result, they said, “There is no parliament, no constitution, and virtually no civil society organizations, and the Libyan military is riddled with tribal and regional divisions. Hence, the potential for a security and political vacuum in Libya continues to be elevated, in our view.”

Libya’s eastern and the western oil fields are ramping up their reduced output, producing 400,000 b/d primarily for domestic consumption. About 130,000 b/d of refining capacity is on stream and is expected to increase to 230,000 when the Zawiyah refinery reaches full output. “It could rise to 300,000 b/d by yearend if the Ras Lanuf plant restarts following repairs,” Barclays Capital reported.

Continued European unrest and the latest “Beige Book”—the US Federal Reserve Bank’s periodic commentary on economic conditions—that suggests a more modest pace of economic growth were primarily responsible for yesterday’s weak market, Raymond James analysts said. The Standard & Poor’s 500 Index reacted “by falling 1.3%, with crude doubling those losses, ending down 2.5%. This in turn sent the Oil Service Index (OSX) and SIG Oil Exploration & Production Index (EPX) down 2.5% and 0.6%, respectively. After 2 days of losses, natural gas rose 1% yesterday, likely buoyed by short covering” they said. Yet commodities and markets were up in early trading Oct. 20 on speculation the European Union may yet reach an agreement to boost bailout funds for Greece.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “West Texas Intermediate has been mainly following the global trend set by the S&P 500 and has therefore also produced a series of daily reversals right in front of $90/bbl. It is also back within its weekly descending channel.” The latest report on US inventories “was on the supportive side, but in front of the EU weekend it will remain difficult to trade WTI outside of a high frequency trade to the S&P.”

Jakob reported, “Four days before the EU summit there is still no agreement and having such give-and-take negotiations so late in the process means that by definition only an imperfect solution will be presented. Between the constitution of Germany, the AAA [credit rating] of France, and the recapitalization of the banks, there will likely be a weak link in whatever the EU proposes.”

However, he said, “The EU is not short of ideas to control the ‘evil’ speculators. After a ban on shorting sovereign credit default swaps, it is now considering prohibiting the rating agencies from issuing revisions to their ratings at an ‘inopportune moment.’ That is indeed a novel way of preserving a triple-A rating.”

In the European market, Jakob said, “The backwardation in RBOB gasoline continues to fall from the cliff, taking the RBOB crack to Brent down with it.” He observed, “If backwardation in ICE gas oil futures has softened since the end of last week, the European distillates premiums remain very strong. However…the distillates stock deficit compared to previous years is more in the Southern or Nordic European countries than in the gas oil hub countries. The latest consumer stock levels for Germany for end-September continue to show them in the normal range.”

US inventories

The Energy Information Administration reported the injection of 103 bcf of natural gas into US underground storage in the week ended Oct. 14, below the consensus estimate of 110 bcf. This raised working gas in storage above 3.6 tcf. That’s 46 bcf below the level this time last year but 113 bcf above the 5-year average.

EIA earlier said commercial US crude inventories fell 4.7 million bbl to 332.9 million bbl in the week ended Oct. 14, opposite the Wall Street consensus for a 2 million bbl increase (OGJ Online, Oct. 19, 2011). Gasoline stocks dropped 3.3 million bbl to 206.3 million bbl in the same period, exceeding analysts’ expectations of a 1.5 million bbl decline. Finished gasoline inventories increased while blending components inventories decreased. Distillate fuel inventories were down 4.3 million bbl to 149.7, also exceeding expectations for a 1.5 million bbl draw.

Energy prices

The November contract for benchmark US sweet, light crudes fell $2.23 to $86.11/bbl Oct. 19 on the New York Mercantile Exchange. That contract will expire at the close of the regular trading session today. The December contract dropped $2.24 to $86.29/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., followed the front-month crude futures contract, down $2.23 to $86.11/bbl.

Heating oil for November delivery declined 4.65¢ to $2.98/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 7.54¢ to $2.67/gal.

The November natural gas contract regained 3.3¢ to $3.59/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued to decline, down 1.5¢ to $3.60/MMbtu.

In London, the December IPE contract for North Sea Brent lost $2.76 to $108.39/bbl. Gas oil for November rose $11.75 to $948.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 71¢ to $108.65/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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