MARKET WATCH: Energy prices fell but likely will rebound on EU agreement

Energy prices tumbled Oct. 26, giving up gains from the previous session with crude dropping 3.3% in the New York market following a government report of a hefty increase in US crude inventory amid market uncertainties about the European Union summit that day.

However, analysts in the Houston office of Raymond James & Associates Inc. reported Oct. 27, “The big news this morning is that Europe's policymakers finally managed to surpass market expectations by actually accomplishing something.” They noted, “Of course, the devil is in the details, but the markets are clearly breathing a sigh of relief: after yesterday's 1% gain for Standard & Poor’s 500 Index, equity futures are up big.” Crude, they said, “is set to rebound today on the bullish news from Europe.”

After 10 hr of negotiations, EU leaders announced agreement on reducing Greece's sovereign debt, financial support of European banks facing additional losses on Greek bonds, and an increase to €1 trillion ($1.39 trillion) in the European Financial Stability Facility to prevent larger economies like Italy and Spain from floundering in the 2-year European economic crisis. Stock and oil prices rose in early markets Oct. 27, along with valuation of the euro.

“A €1 trillion bailout fund [is a] change we can believe in. Also, more bond purchases by the European Central Bank, deficit reduction by Italy, and a 50% haircut for Greece's bondholders,” said Raymond James analysts.

However, James Zhang at Standard New York Securities Inc., the Standard Bank Group, cautioned, “The underlying economic dynamics of the deal imply a lot more economic misery, centered around pressure on banks and pressure on countries to deliver more austerity. For now, the delivery of the deal by the EU should help support the risk-on feel of the market. However, the crisis will drag on further in the absence of the critical details on implementing the deal and the more fundamental issue regarding fiscal federalism. Consequently, a significant downside risk to the oil market remains, although we remain fairly positive in the near term due to the rather tight physical oil market.”

More good news for markets came from an Oct. 27 Commerce Department report the US gross domestic product expanded at a 2.5% annual rate in the third quarter, up from 1.3% in the second quarter and the strongest growth in a year. That compares with GNP growth of 0.9% in the first 6 months of 2011. However, the Associated Press reported, “It's far below what's needed to lower painfully high unemployment, which has been near 9% for the past 2 years.”

A larger decline yesterday in the price of West Texas Intermediate compared with North Sea Brent widened the price spread between the two crudes. “The middle-distillate crack rallied strongly, driven by a large draw in US distillate inventories. Light products also gained over crude oil, which helped with a recovery in refining margins. The term structures for both WTI and Brent weakened as well on the back of the crude oil inventory build,” said Zhang.

US inventories

The Energy Information Administration under the Energy Department reported commercial US crude inventories climbed 4.7 million bbl to 337.6 million bbl in the week ended Oct. 21. Gasoline stocks dropped 1.4 million bbl to 204.9 million bbl, and distillate fuel inventories fell 4.3 million bbl to 145.5 million bbl (OGJ Online, Oct. 26, 2011).

EIA today reported the injection of 92 bcf of natural gas into US underground storage last week, up from the Wall Street consensus of 87 bcf. That increased working gas in storage to more than 3.7 tcf. That’s 28 bcf less the amount in storage in the comparable week in 2010 but 158 bcf above the 5-year average.

Raymond James analysts noted crude inventories at Cushing, Okla., increased for the third consecutive week, by an additional 400,000 bbl. “Refinery utilization rose for the first time in 3 weeks, from 83.1% to 84.8%. The demand picture ticked up this week, with total petroleum demand increasing week-over-week (up 3%) and remains essentially flat year-over-year on a 4-week moving average basis,” they said.

Zhang said, “The build in crude inventories [was] mainly driven by a sharp increase in imports of 1.5 million b/d [from the previous week]. The implied demand for gasoline fell further to set a new seasonal low on a 4-week running average basis. In contrast, US distillate demand remained firmly above its previous 5-year average level.”

He reported, “Crude oil production in Libya has now risen to 400,000 b/d, with about 150,000 b/d from the Sarir field. However, so far, the recovery in Libya supply has yet to cool the physical market, [and] Brent structure stays in very steep backwardation. On the demand side, cracks are starting to appear in the otherwise rather [resilient] picture, as poor refining margins have persisted since September. The rally in refining margins following the fire at Shell’s refinery in Singapore has fizzled out over the past 2 weeks. As winter approaches, heating demand will have an increasing impact on the oil market, particularly with the low inventories in middle distillates.”

Meanwhile, the International Energy Agency (IEA) in Paris published its review of Greek energy policies in which it advised, “Reforming Greece's electricity and gas markets is a policy imperative that should add efficiency and dynamism to the Greek economy. This, in turn, should help generate self-sustained employment and prosperity for the country.”

The report notes Greece “has a large potential for wind and solar energy and is rightly determined to fulfill this potential. The renewable energy sector also provides opportunities for new industrial development, in particular if linked with research and development activities. To facilitate renewable energy projects, the government has recently increased feed-in tariffs, shortened and simplified the licensing procedures, and introduced stronger incentives for local acceptance.”

Such actions have been implemented in other countries that have since reduced tariffs and incentives because of the rising cost to energy consumers during the economic crisis. As a result, many wind-power companies around the world are in financial difficulties as governments reduce incentives.

Energy prices

The December contract for benchmark US sweet, light crudes fell $2.97 to $90.20/bbl Oct. 26 on the New York Mercantile Exchange. The January contract dropped $2.75 to $9.18/bbl with that market still in backwardation. On the US spot market, WTI at Cushing was down $2.80 to $90.20/bbl, back in sync with the front-month futures contract price.

Heating oil for November delivery declined 3.44¢ to $3.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 4.82¢ to $2.65/gal.

The November natural gas contract fell 6.8¢ to $3.59/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.8¢ to $3.66/MMbtu.

In London, the December IPE contract for North Sea Brent dropped $2.01 to $108.91/bbl. Gas oil for November lost $3 to $954/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes decreased 64¢ to $108.83/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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