MARKET WATCH: European discord over Greek debt undermines markets

The price of crude oil topped $88/bbl in intraday trading Oct. 17 in New York but closed at a small loss for the day as commodities and equities retreated after French and German officials clashed over a second rescue package for Greece.

Germany wants banks to accept cuts of 50-60% on their Greek bond holdings to reduce Greece’s overall debt load that otherwise could reach 180% of the country’s economic output next year. German officials say a solution must be found to allow Greece to repay its debts over the long run.

But France wants to stick with a preliminary agreement with private investors in July that would reduce Greek bond holdings 21% primarily through reduced interest rate and deferred payments that would provide short-term relief. French banks are the biggest holders of Greek government bonds, but France’s position is supported by the European Union’s executive commission.

Agreement between the two biggest economies in the Euro-zone is necessary to unite all 17 members of the currency union behind some sort of solution at a crisis summit scheduled Oct. 23.

The result was a “disappointing, frustrating, normal day” in the energy market, “largely spurred by the broader market, which teased us by opening up with a smile and subsequently getting its teeth kicked out,” said analysts in the Houston office of Raymond James & Associates Inc. After rallying almost 10% through the previous nine trading sessions, the Dow Jones Industrial Averaged opened “slightly in the black” Oct. 17 “but subsequently took a 250-point (or 2%) dive following commentary by Germany that the fix to Europe's debt crisis may not be as speedy as anticipated,” they said.

“Crude didn't completely shadow the broader markets for once and managed to escape the selloff, ending the day relatively flattish while the Oil Service Index and [SIG Oil Exploration & Production Index] EPX retreated 3.8% and 1.6%, respectively (so much for a boost to E&P stocks on ‘Merger Monday’),” Raymond James analysts said. Broader market futures, crude, and natural gas were all lower in early trading Oct. 18.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The Germans told the market to stop dreaming about a miracle solution, and global markets did just that…. As for the European miracle solution to be delivered over the weekend, we would not be surprised if they come up with some bright idea but to be applied (maybe) in a year or two.”

Jakob reported, “There were wild swings in relative values yesterday. The Brent premium to West Texas Intermediate corrected lower quite strongly, but the backwardation in ICE gas oil also softened from the peaks seen at the end of last week and the reformulated blend stock for oxygenate blending (RBOB) backwardation fell off. The latest demand numbers for France (September) show oil demand growth very similar to that of Italy. French gasoline demand was 5.9% lower than a year ago, but Diesel was up 0.2%.”

He said, “Technically, Brent performed poorly yesterday. Contrarily to the previous post-expiry day, it did not manage to perform a backwardation convergence (December moving up to the expiring November value), and Brent was stopped right on the upper band of the weekly descending channel, which is therefore confirmed further. The 200-day moving average did not provide much support for Brent, and we are therefore about to see a negative crossover of the 100-day to 200-day moving average. The slope of the 5-day moving average is also starting to flatten; hence Brent is at risk of seeing a series of negative crossovers on the moving averages.”

Jakob said, “The gas oil cracks were stronger yesterday and overall the distillate complex also was helped by a widening of the heating oil to gasoline premium. On ICE gas oil we have to watch the support on the 200-day moving average at $933.75/tonnes.”

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “It appears as though the weakness [in energy prices] will persist on news of a slowing Chinese economy and the expectations of growing US oil inventories.” He said, “[Market] participants have once again switched to risk-off mode, with the consequent weakness in financial markets spilling over into commodities.”

China’s performance

The Chinese third-quarter gross domestic product was reported up 9.1% from a year ago but slightly below expectations. “Many countries would be happy to own that GDP growth figure, but this is China and it is therefore the weakest number since 2009,” said Jakob.

He reported, “The September Chinese refinery runs also show that China is growing but not surging ahead; refinery runs were only 130,000 b/d higher than in September 2010 (a marginal increase of 1.5%).” Chinese oil production was down 220,000 b/d compared with September 2010. However, Jakob said, “The growth in refining demand was so small that despite the drop in production the growth in crude oil requirements is a low 350,000 b/d.”

Jakob noted Chinese refinery runs during the third quarter were 380,000 b/d higher than a year ago, while officials at the International Energy Agency in Paris “plugged in 600,000 b/d for their estimate of Chinese oil demand growth” in that period compared with the third quarter of 2010. “The IEA will have to make some further downward adjustment to its demand numbers. The oil-specific data coming out of China is much worse than the GDP numbers coming out slightly below expectations,” he said.

Weakness in oil markets also is “encouraged by the expectation that the Department of Energy report [to be published Oct. 19] will reveal that US crude stockpiles have climbed for a second week. According to consensus, inventories probably rose 2 million bbl during the week ended Oct. 14,” Ground reported.

In other news, Moody's Investors Service warned that France’s AAA rating could be placed on a negative outlook within the next 3 months. “Investors remain wary that this weekend’s EU summit will result in any decisive steps to solve the region’s crisis,” said Ground.

Energy prices

The November contract for benchmark US sweet, light crudes climbed as high as $88.18 in the Oct. 17 trading session but closed with a 42¢ loss at $86.38/bbl on the New York Mercantile Exchange. The December contract retreated 38¢ to $86.62/bbl. On the US spot market, WTI at Cushing, Okla., matched the front-month futures contract, down 42¢ to $86.38/bbl.

Heating oil for November delivery declined 4.22¢ to $3.01/gal on NYMEX. RBOB for the same month dropped 8.18¢ to $2.74/gal.

The November contract for natural gas decreased 1.5¢ to $3.69/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 21¢ to $3.70/MMbtu.

In London, the new front-month December IPE contract for North Sea Brent fell $2.07 to $110.16/bbl. Gas oil for November declined $4.25 to $947.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.12 to $110.13/bbl.

Contact Sam Fletcher at

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