MARKET WATCH: Hopes for European recovery buoy energy prices

Energy prices scrambled higher Oct. 6 with the front-month crude oil futures contract price up 3.5% to top $82/bbl again in the New York market after Germany proposed a more coordinated approach to financial aid for Greece that may include 20,000 hectares of solar power parks to export energy to Germany.

Germany began closing all 17 of its nuclear reactors in the wake of Japan's nuclear disaster and is now seeking alternative energy sources.

In other action, the Bank of England extended its quantitative easing program from £200 billion to £275 billion, again raising market hopes for European economic recovery.

“Markets responded with the Dow Jones Industrial Average up 1.7%,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks followed suit as the [SIG Oil Exploration & Production Index] EPX and the Oil Service Index rose 4.2% and 2.3%, respectively.”

On Oct. 7, the US Department of Labor reported the addition of 103,000 US jobs in September, a better-than-expected increase. However, unemployment is still at 9.1%.

Market uncertainty

Analysts’ “main concern still lies with the Euro-zone, with the market expecting further actions coming out the Group of 20 [G20] finance ministers’ meeting in a week’s time. We continue to see the oil market torn between a very tight physical market and uncertainty in the financial market,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“European leaders who a few weeks ago were saying that banks were well capitalized are now holding meetings on steps to take to recapitalize (or nationalize) European banks,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “When the major European corporations are putting together cash-preservation contingency plans and the European Central Bank has to open liquidity lines, it is quite clear that we are currently in a credit crunch and that concerns are growing about liquidity for the end-of-the-year passage.”

He acknowledged, “The situation has not reached yet the peaks of 2008, but we also need to keep in mind that the situation in 2008 gently deteriorated as we got closer to the end of the year. Maybe the European leaders, the G20, etc., will be able to prevent a credit crunch contagion, but the current level of risk is something that we did not have a year ago or even 3 months ago.”

In Oct. 6 trading, Zhang said, “Gasoline and middle distillates cracks strengthened further on tight supplies and so did the term structures of Brent and West Texas Intermediate. “More supply disruptions in the North Sea kept Brent in very steep backwardation, although physical crude differentials—particularly those of high sulfur grades—have weakened during the past few weeks.”

Jakob said, “Technically, WTI continued to rebound, but for the weekly charts it now needs to break the resistance of $83.60/bbl. The 5-day moving average is still below the 9-day moving average. Hence it is important for WTI to break that resistance to have some positive momentum at the start of next week.”

He said, “Brent needs to close above $105/bbl to maintain some momentum next week. The problem is that buying above that level one needs to have a next target at $110/bbl and a great confidence in the global economy for the sustainability of such price levels.”

Energy prices

The November contract for benchmark US light, sweet crudes was elevated $2.91 to $82.59/bbl Oct. 6 on the New York Mercantile Exchange. The December contract escalated by $2.97 to $82.80/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.91 to $82.59/bbl.

Heating oil for November delivery increased 8.45¢ to $2.86/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed 11.68¢ to $2.69/gal.

The November contract for natural gas regained 2.8¢ to $3.60/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., fell 11.5¢ to $3.49/MMbtu.

In London, the November IPE contract for North Sea Brent gained $3 to $105.73/bbl. Gas oil for October jumped $10 to $878/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.73 to $101.63/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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