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MARKET WATCH: European crisis continues to undercut energy prices

Energy prices fell in the last trading session of September and likely will continue that trend through the first session of October after Greece's finance ministry said Oct. 2 the country’s deficit is likely to be 8.5% of this year’s gross domestic product, higher than the previously projected 7.8%.

In Houston, analysts at Raymond James & Associates Inc. noted, “Today marks exactly 3 years since the US passed the $700 billion ‘bailout’ package, and memories of the credit crisis remain fresh in investors' minds as Europe fights its own debt crisis. On [Sept. 30], the broader market ended down [more than] 2% on continued nervousness of a Euro-zone contagion and a slowing global economy.”

Stock markets took a beating in overnight and early trading Oct. 3 as Greece’s inability to reduce its borrowings despite austerity measures fanned fears that the sovereign debt crisis in Europe will deepen and spread.

“Once again, oil prices have nosedived as economic gloom takes over from supply tightness in driving the market,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “Still bubbling away…is the potential Eyjafjallajokull of Europe’s failure, so far, to resolve the debt crisis that started with Greece but has now engulfed some of the largest economies in the European Union.” Eyjafjallajokull is the Icelandic volcano that erupted last year, halting European air traffic for 6 days with its clouds of ash.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said. “Net for last week, front-month West Texas Intermediate and Brent fell by 65¢/bbl and $1.21/bbl, respectively, as the market gave back all the gains made during the first half of the week on hopes of radical solutions for the Euro-zone debt crisis.”

For September, Zhang said, “Front-month WTI and Brent fell by $9.61/bbl and $12.09/bbl, respectively. During the past month, the physical crude oil market remained very tight, commercial inventories fell further, but refining margins were poor. Economic data from the US appeared to be more mixed, rather than downright negative. Nevertheless, the market was led by increasing concerns over the Euro-zone debt crisis, and a probable Greek default, which is likely to linger on in the coming weeks and months.”

He said, “Product cracks generally moved higher and refining margins continued to recover, driven by the shutdown of Shell’s 500,000 b/d refinery in Singapore and the closure of ConocoPhilips’s trainer refinery in Philadelphia. In the physical market, sour crude differentials continued to weaken, while those of sweet crude remained firm. Crude differentials over dated Brent were largely unchanged after steep falls during the past 2 weeks. The term structures for both WTI and Brent strengthened on Friday, despite the sell-off in the flat price.”

For now, Zhang said, “The flat price of oil appears to be firmly stuck in a downward channel. As prices fast approach the lower range of the channel, some short-term rebound is likely. We expect volatility to remain elevated as the oil market is torn between a tight physical market and recession fears, in addition to all the uncertainties over the next policy move by the Euro-zone officials.

Olivier Jakob at Petromatrix in Zug, Switzerland, recalled the “bounce” in Standard & Poor’s 500 index prices early last week “with a lot of agitation created around a supposed ‘leveraged rescue plan’ for Europe, but the idea that the only solution left for Europe is to create some monster financial-engineering scheme is more worrying than reassuring.” He reported, “The S&P 500 lost only 0.44% during the week but 7.18% during the month and is [down] 10.04% for the year. The NASDAQ lost 2.73% during the week, 6.36% during the month, and is [down] 8.95% for the year…. It is now the fifth consecutive month that the S&P 500 has printed a red number.”

Share prices for Morgan Stanley, the second-largest US investment bank, fell 6.7% Sept. 30 on concerns about its exposure to European banks. The Credit-Default-Swaps (CDS) of Morgan Stanley “are now higher than on some of the Italian banks and at the highest level since the fourth quarter of 2008 (but still far from the 2008 peaks),” Jakob said.

“The financial sector has been weak throughout, the year but in the first half the weakness in the financial sector was compensated in the S&P 500 by a strong energy sector. As we have been warning repeatedly during the first half, once oil prices start to retreat it will be mathematically very difficult for the S&P 500 to maintain a level above 1,300,” said Jakob. “Part of the ‘success’ of QE2 [the second phase of the Federal Reserve Bank's quantitative easing program] was a lift of the S&P through higher oil prices (due to the correlation with the energy sector); it does not make any sense on a pure economic basis, but unfortunately correlations and financial engineering can create cycles of ‘destruction economics.’ If oil prices continue to slide, the S&P 500 will have to be further supported by consumer staples, consumer discretionary [spending], and information technology, but those sectors are not particularly oversold.”

Price forecasts reduced

At Pritchard Capital Partners LLC, New Orleans, research analysts lowered price forecasts for both oil and natural gas, citing “a backdrop of contagion in the European banking system, fears of recession both domestically and abroad, pervasive weakness in the US jobs and housing markets, and renewed worries over the US financial sector (we could go on).”

They reduced their estimates of oil prices to an average $86.75/bbl for the fourth quarter, down from $99/bbl previously, and to $89.30/bbl from $95/bbl in 2012. “There is no change to our $90 midcycle price,” they said.

For natural gas, Pritchard Capital Partners lowered their fourth quarter outlook to $4/MMbtu from $5.28/MMbtu, with the 2012 estimated down to $4.40/MMbtu from $5.50/MMbtu. They reduced their midcycle gas price estimate to $5/MMbtu from $6/MMbtu previously. Their gas price estimate for 2013 is an average $5/MMbtu.

Energy prices

The November contract for benchmark US light, sweet crudes traded at $78.60-83.23/bbl before closing at $79.20/bbl, down $2.94 Sept. 30 on the New York Mercantile Exchange. The December contract dropped $3.01 to $79.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., lost $2.94 to $79.20/bbl.

Heating oil for October delivery declined 2.33¢ to $2.79/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.68¢ to $2.63/gal.

The November contract for natural gas decreased 8.1¢ to $3.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 10.7¢ to $3.66/MMbtu.

In London, the November IPE contract for North Sea Brent was down $1.19 to $102.76/bbl. Gas oil for October lost $14.75 to $883.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $1.54 to $101.57/bbl. So far this year, OPEC’s basket price has averaged $107.31/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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