MARKET WATCH: Oil prices boosted by faith EU will solve its financial crisis

Front-month crude closed up 1.5% on an optimistic outlook for Europe in the New York market Oct. 21, having pulled back in the final hours of the session from an earlier surge. Natural gas traded flat.

North Sea Brent was harder hit than West Texas Intermediate, giving back all of its gains to close marginally lower. Market sentiment appeared to favor a further increase in crude prices in early trading Oct. 24, “although again it appears as if WTI could fare better than Brent,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. Optimistic anticipation of favorable action from the European Union summit scheduled Oct. 26 “and encouraging data out of Asia (Japanese exports and Hong Kong and Shanghai Banking Corp.’s preliminary Chinese Purchasing Managers Index [PMI] for manufacturing) are keeping energy markets buoyant,” he said.

In Houston, analysts with Raymond James & Associates Inc. noted Tunisia over the weekend became the first country to successfully hold free elections since the Arab Spring began, while US President Barack Obama announced his intention to withdraw troops from Iraq by yearend. “Now if only the European Union could straighten out its fractious state, maybe we could get back to business as usual,” they said.

In Zug, Switzerland, Olivier Jakob at Petromatrix was less optimistic. He reported, “Data from ICI [Investment Co. Institute] continue to show outflows from US equity mutual funds. The trend in outflows started in early May 2010 as riots in Athens shocked the financial markets. This is also a reminder as to how long this rolling kick-the-can-down-the-road Greek crisis has been with us; and this week will surely not be the last week of crisis.”

He said, “According to the Troika [European Commission, European Central Bank (ECB), and International Monetary Fund], private investors need to take a haircut of 50% for the Greek debt-to-gross domestic product ratio to fall back to 120% by 2020, or a haircut of 60% for it to reach 110% by 2020. This is of course a much worse picture than 3 months ago, and it is fair to work with a risk assumption that the picture could be even worse a few months from now. Europe continues to work in cacophony, and we will have to wait for [the midweek summit] to have a final outcome. Then again, the deadline has been pushed back so many times that we cannot even be sure of that, and [German Chancellor Angela] Merkel made sure to note that ‘the summit…will not be the last step to overcome the crisis.’ The weekend [EU] meetings were so serious that the Belgium Finance minister left them early…in order not to miss the start of the premiere showing of the new Tintin film [based on series of classic comic books created by the Belgian artist Georges Remi]. One has to have the right priorities.”

Jakob said, “This week again it will be difficult to trade in the global markets anything but the European headlines and rumors, and the week that follows we will have the Group of 20 meeting in France.”

Highlighting the EU’s weekend and scheduled midweek meetings “is the continuing rift between France and Germany on how to boost funds to the €440 billion European Financial Stability Facility (EFSF) now widely regarded as essential to fight off the growing risks to large European banks and government bond markets—with the Italian bond market becoming an ever-increasing concern,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC.

Furthermore, they said, “The slow pace of the return of Libyan oil to the market is another reason that supply has been tight, and this has resulted in a steep backwardation on the North Sea grade, where prompt oil for physical delivery sells at a premium to the futures market. Because prompt oil is more expensive, this tends to make buying it and storing it more expensive than buying it on the futures market for delivery at a later date.”

They reported, “Although crude oil remains tight, renewed weakness is now underway on other commodities, and it looks increasingly like oil prices are defying gravity. Despite the tight physical market, barely a fortnight ago ICE Brent had been close to dropping below $100/bbl as the economic situation threatened to spiral out of control The market is now waiting in anticipation that the Euro-zone summits will have a positive outcome and a plan for fiscal injection into both European banks and the EFSF will be agreed upon in the week ahead. Differences on how the EFSF will be funded have widened over the last few days, with France now concerned the current plan could affect its coveted AAA credit rating, while German concerns over the ECB being exposed unlimitedly to the EFSF bring back strong historical memories. Confidence in Europe’s largest economy is not high.”

Meanwhile, Standard & Poor’s 500 Index last week jumped 1.2%, “marking a 9.4% gain since the beginning of October and on track for index's best month in 11 years,” Raymond James analysts said.

They further noted, “Oil drilling activity in North America is set to remain very robust, barring the unlikely scenario of the futures curve falling and staying below the $70/bbl level. In other words, if you're looking for reasons why activity might slow down appreciably, the price of oil is not it. Access to capital is also not a problem—most major producers are flush with cash, while smaller players can tap the equity markets (royalty trusts, etc.) and sign strategic partnerships. Government policy (e.g., the ongoing ‘permitorium’ in the Gulf of Mexico) is a more substantive risk.”

Ironically the oil and gas industry “particularly in the US is running out of the most important resource of all: people,” they said. “We have written several times before (most recently in 2008) about the ‘graying of the oil patch’—the stark reality that, as the current petroleum professionals approach retirement, their ranks are not being fully replenished with new hires. At a time when the US is suffering from persistently high unemployment, demand for professionals in the oil and gas industry couldn't be better—and their supply is struggling to keep pace.”

Energy prices

The new front-month December contract for benchmark US light, sweet crudes regained $1.33—little more than half its losses over the previous two trading sessions—to $87.40/bbl Oct. 21 on the New York Mercantile Exchange. The January contract increased $1.26 to $87.47/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.10 to match the December futures price of $87.40/bbl.

Heating oil for November delivery dropped 12.6¢ to $3.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.91¢ but closed essentially unchanged at a rounded $2.68/gal.

The November natural gas contract on NYMEX dipped 0.1¢ to close at $3.63/MMbtu, also unchanged. On the US spot market, gas at Henry Hub, La., fell 11.1¢ to $3.52/MMbtu.

In London, the December IPE contract for North Sea Brent lost 20¢ to $109.56/bbl. Gas oil for November rebound $19.50 to $955.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.12 to $108.31/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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