Oil prices continued falling Oct. 4 with crude down 2.5%, but a last-minute surge in the equity market lifted the Standard & Poor’s 500 index from a 1.8% decline to a 2.3% gain in the New York market.
As a result, broader market futures were up in early trading Oct. 5, pulling oil and natural gas prices higher too, “on hopes that European leaders are preparing to inject much needed liquidity into the banking system,” said analysts in the Houston office of Raymond James & Associates Inc. The front-month gas futures contract had posted a marginal gain Oct. 4.
“Up until 40 min before the close of the S&P 500, everything looked pretty gloomy,’ said Olivier Jakob at Petromatrix in Zug, Switzerland. “Crude oil had settled close to the lows of the days, unable to rally on flashing headlines of a local street disturbance in eastern Saudi Arabia. [Federal Reserve Chairman] Ben Bernanke had not delivered anything of substance (bulls and bears could cherry-pick between ‘the Fed leaves no option off the table’ and ‘no immediate plan’ for a third round of quantitative easing), and Apple Inc. had not delivered the iPhone 5 to the world. The S&P 500 was trading down towards the lows of the day, which would have resulted in a very weak technical picture. However, all was saved by a mother-of-all-closing-rally that took the S&P 500 up 4% [and] took crude oil and the euro higher with it.”
Jakob reported, “The only news that coincided with the start of this major closing-rally was a very vague story (again) published on the [London Financial Times] web site (again) about European Union ministers ‘examining ways of co-coordinating recapitalizations of financial institutions,’ with the necessary footnote that ‘details of the plan are still under discussion.’”
He warned, “The problem in buying crude oil (either North Sea Brent or West Texas Intermediate) today is that one needs to have some confidence in the making of the late 4% rally in the S&P 500 yesterday.” Headlines-led late rallies “have not been sustained in recent days,” he said.
However, Raymond James analysts said they are “not so sure” the market is “gearing up for another pump and dump.” They said, “One thing is certain: everything hinges on Europe.”
Jakob said, “As far as the reality of Europe, we have to note that Moody's [Investors Service] heavily downgraded the ratings of Italy yesterday from Aa2 to A2 (three notches down) with a negative outlook. That was somewhat expected given that it follows the downgrade [by] S&P. With Dexia SA bank being split up and the creation of a ‘bad bank’ to be guaranteed by Belgium and France, it will interesting to see what becomes of the ratings of those two countries, especially given that there is an obvious risk that this will not be the only European banking bail-out.”
The Oct. 4 price settlement for WTI was “not pretty given that apart from the lower close, lower high, and lower low, WTI also printed a new low for the year,” said Jakob. The price increase in late trading “could enable a bottoming pattern but WTI will still face resistance at $80/bbl,” he said.
“Technically, on the ‘official’ charts Brent is still in a negative momentum with a lower close, a lower high, and a lower low. There was a rebound attempt during the day but the closing action in crude oil (both in Brent and WTI) was weak yesterday as crude oil settled close to the daily lows,” said Jakob. “However, the late spectacular surge on the correlation to the S&P closing rally prints a chart gapping higher for today, right when Brent was testing the lows of August. If the support can be maintained on crude oil, then given the late action yesterday the charts could start to print a more convincing bottoming pattern. For that, Brent needs to close above $103/bbl.”
With European refineries on maintenance or reduced runs and the cold shutdown of the Shell’s 500,000 b/d refinery in Singapore, Jakob said, “European diesel premiums have surged to levels not seen since the refining capacity squeeze of 2008. The gas oil cracks are still far from the 2008 levels, but with some easing in crude oil and strong product premiums the refinery economics have improved significantly compared to September and should not justify any more run cuts for economic reasons.”
In other news, James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Yesterday there was a riot in Saudi Arabia. Eleven members of the security forces were attacked and injured in a Shiite Muslim town in the east. This underscores again the instability of this major oil-producing region. But we don’t see this as a major risk—yet. Instead, what is important is how the Organization of Petroleum Exporting Countries, in particular Saudi Arabia, will act when faced with lower oil prices. The new spending plan announced earlier this year by King Abdullah requires an oil price above $90/bbl to balance its budget, although the kingdom has built up significant reserves.”
The Energy Information Administration said Aug. 5 commercial US inventories of crude dropped 4.7 million bbl to 336.3 million bbl in the week ended Sept. 30, counter to the Wall Street consensus for a 1.5 million bbl increase. Gasoline stocks decreased 1.1 million bbl to 213.7 million bbl in the same week, still above average for this time of year. Analysts also were expecting an increase of 1.5 million bbl in gasoline. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased 700,000 bbl to 156.9 million bbl, exceeding expectations of a 300,000 bbl decline.
The American Petroleum Institute earlier reported US crude stocks fell 3.07 million bbl to 344.2 million bbl last week. It said gasoline inventories dropped nearly 5 million bbl to 212.4 million bbl in the same period while distillate fuel stocks lost 2 million bbl to 155 million bbl.
EIA reported imports of crude into the US were down 1 million b/d last week to 8.7 million b/d. In the 4 weeks through Sept. 30, US oil imports averaged 8.8 million b/d, down 246,000 b/d from the comparable period a year ago. Gasoline imports last week averaged 505,000 b/d while distillate fuel imports averaged 208,000 b/d.
The input of crude into US refineries declined 73,000 b/d to 15.1 million b/d last week with units operating at 87.7% of capacity. Gasoline production increased to 9.3 million b/d while distillate fuel production increased to 4.7 million b/d.
The November contract for benchmark US light, sweet crudes dropped $1.94 to $75.67/bbl Oct. 4 on the New York Mercantile Exchange. The December contract fell $1.96 to $75.87/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.94 to $75.67/bbl.
Heating oil for November delivery declined 2.95¢ to $2.72/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.26¢ to $2.49/gal.
The November contract for natural gas gained 2.1¢ to $3.64/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued to slip, down 1.7¢ to $3.58/MMbtu.
In London, the November IPE contract for North Sea Brent dropped $1.92 to $99.79/bbl. Gas oil for October lost $9.25 to $865.25/tonne.
OPEC reported the average price of its basket of 12 benchmark crudes dropped to $98.59/bbl Oct. 4 from a revised Oct. 3 price of $99.71/bbl.
Contact Sam Fletcher at email@example.com.