MARKET WATCH: Crude oil prices rebound in optimistic market

Oil prices rose with the front-month crude contract closing above $88/bbl Oct 19 in the New York market, up 2.3% on an optimistic report of accord in the European debt mess as traders shrugged off disappointing Chinese growth data and expectations of a rise in US oil inventories.

But even as a cold front lowered temperatures in several states, the near-month natural gas contract dropped 2.4% in anticipation of a bearish report on US inventory.

“The increased optimism in [both equity and commodity] markets was sparked by a report that France and Germany had agreed on a €2 trillion boost to the European Financial Stability Fund,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “The figure of €2 trillion was soon denied by European Union officials, but the confidence that it engendered in markets appears to have remained. The US and Asian equity markets ended the day up, while European stocks are trading in the black,” he reported early Oct. 19.

Later, however, analysts in the Houston office of Raymond James & Associates Inc. said, “Moody's Investors Service two-notch downgrade [overnight] of Spanish government debt is arresting yesterday's momentum, as Standard & Poor’s futures are in the red [in early trading in New York].  Crude futures are following suit while gas futures are green.”

Ground reported, “Equity futures are mixed, which raises doubts about the sustainability of the current appetite for risk. This is unsurprising given that yesterday’s poor US corporate earnings results (Goldman Sachs, Bank of America, and Apple) and Moody’s double-notch downgrade of Spanish sovereign debt provide little cause for optimism. Consequently, we expect oil markets to lose momentum today.”

He said, “Another possible drag on oil markets, and commodities in general, is yesterday’s decision by the Commodity Futures Trading Commission (CFTC ) to accept a provisions of the Frank-Dodd Act that would allow the commission to limit speculative trading in commodities. Essentially, the rule will limit trader positions to 25% of deliverable supply in the month nearest to delivery. Cash-settled natural gas contracts will, however, be subject to different provisions.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The flat price of crude oil continues to trade an extreme correlation to the S&P 500 index and to the euro-dollar [valuations].” As for the CFTC vote, he said, “We are not sure that position limits will have an influence on the correlation trades.

He said, “While the flat price of crude oil does its thing with the S&P 500, the time spread structure is weakening across the board apart from West Texas Intermediate.” 

Jakob said, “If a ‘Cushing glut’ is often used as an argument to justify the Brent premium to WTI, the facts are that stocks in Cushing, Okla., have not been this tight since October 2007. Given that the storage capacity in Cushing has increased over the years, we measure the tightness in Cushing as the differential between current stock levels and the highest stocks seen over a year. On that basis, there is about 11 million bbl of empty storage capacity in Cushing, a level only briefly surpassed in the fourth quarter of 2007. Back then the WTI November-December spread expired in a backwardation of $1.60/bbl compared to the current contango of about 20¢/bbl. We expect the stocks in Cushing to rebuild during the fourth quarter, but the immediate stock situation allows in our opinion an expiry squeeze if anyone has such an agenda. That will be a risk going into this expiry.”

The November crude futures contract is to expire with the close of the New York market’s regular session Oct. 20.

“Meanwhile in Europe, the backwardation in Brent is easing while the Brent premium to WTI loses another $1/bbl. The Forties differentials continue to come off and are at the weakest levels since early August. Back then the backwardation in Brent was below 50¢/bbl and the Brent premium to WTI closer to $20/bbl than to $25/bbl,” said Jakob

He said, “The ICE Gasoil backwardation is also easing. The German commercial stocks of distillates are at multi-year highs, the German consumer stocks are at normal average levels for the season, the retail prices are a record high. Winter remains a weather market, but with the above inputs, we remain cautious on the expected strength of German winter demand.”

Meanwhile, ministers and representatives from the 28 member countries of the International Energy Agency apparently applied more jawbone than muscle to energy issues during their annual ministerial meeting Oct. 18-19 in Paris. At the end of that meeting, they resolved to:

• Continue efforts to assess and ensure energy security.

• Promote diversity of supply by the safe and sustainable development of natural resources, new transit routes, renewable energy, and low carbon energy technologies.

• Encourage market openness, flexibility, and transparency.

• Encourage innovative, cost-effective ways to provide secure energy supplies while reducing greenhouse gas emissions.

• Strengthen cooperation with member and partner countries, the private sector, and international bodies.

Statements and conclusions published at the close of that meeting did not say how they plan to accomplish those goals.

US inventories

The Energy Information Administration reported Oct. 19 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. 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.

Imports of crude into the US fell 1.2 million b/d to 7.9 million b/d last week. For the 4 weeks through Oct. 14 crude imports averaged 8.9 million b/d, an 187,000 b/d increase from the comparable period in 2010. Gasoline imports last week averaged 458,000 b/d, while imports of distillate fuel averaged 107,000b/d.

The input of crude into US refineries declined 134,000 b/d to 14.4 million b/d last week with units operating at 83.1% of capacity. However, gasoline production increased to 9.3 million b/d. Distillate fuel production decreased to 4.4 million b/d.

Energy prices

The November contract for benchmark US light, sweet crudes rebound by $1.96 to $88.34/bbl Oct. 18 on the New York Mercantile Exchange. The December contract gained $1.91 to $88.53/bbl. On the US spot market, WTI at Cushing was up $1.96 to $88.34/bbl.

Heating oil for November delivery increased 1.41¢ to $3.03/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.4¢ to $2.75/gal.

The November contract for natural gas continued falling, down 13.5¢ to $3.55/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 9¢ to $3.61/MMbtu.

In London, the December IPE contract for North Sea Brent increased 99¢ to $111.15/bbl. Gas oil for November continued to drop, down $11.25 to $936.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $2.19 to $107.94/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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