MARKET WATCH Oil prices pull back after traders take closer look at EU deal

Crude oil prices pulled back slightly Oct. 28 as investors began questioning details of the European Union’s debt crisis agreement that had triggered a 3% jump in the front-month crude futures contract the previous session on the New York market.

“Fears over Portugal and Italy have yet to subside,” said analysts in the Houston office of Raymond James & Associates Inc. “In addition to Europe, the US economy will be in the spotlight this week, with Federal Reserve Chairman Ben Bernanke set to speak [at the Nov. 1-2 meeting of the policy-making Federal Open Market Committee], and investors hope he will not spook the market.”

Meanwhile, residents from Maine to Maryland are without electrical power after an early winter storm over the weekend dumped snow in the Northeast, snapping power lines.

Oil prices slipped Oct. 28 “despite better-than-expected US macroeconomic data,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Gasoline cracks fell the most among the oil complex as the monthly US data showed that gasoline demand in the US fell below 9 million b/d in August. The same report showed that middle distillate demand continued to grow during August, which helped to firm distillate cracks. Meanwhile, the Brent structure softened further, with the Forties [oil field crude] differential turning negative, on improved supply from the North Sea.”

Still, the front-month West Texas Intermediate contract had a net gain of $5.92/bbl last week while front-month Brent gained only 35¢/bbl. US economic data showed the US economy grew 2.5% in the third quarter, “which helps to alleviate fears of a double-dip recession in the US,” Zane said.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The 3-2-1 December refinery margin on the basis of WTI lost $5.70/bbl during the week and about $10/bbl over the last 2 weeks due to the reduction in the Brent premium to WTI. The WTI margins are still very healthy, but the cracks to Brent, US Gulf Sour, or Light Louisiana Sweet remain very poor. The reformulated stock for oxygenate blending (RBOB) crack to Brent is marginal while RBOB to LLS is still negative.”

However, Jakob said, “The big headline of the week was the move of WTI back to a backwardation structure.” He further noted, “Stocks in Cushing, Okla., have been rebuilding slightly over the last 3 weeks, but they are still at a strong deficit to recent peaks. While the community of analysts tends to be focused on the feasibility timetable of the Keystone pipeline, for now the high spread of US Gulf to WTI has not only translated in some increase of the crude oil flows from [the Midwest to the Gulf Coast, up 145,000 b/d in August vs. a year ago] but more significantly a [384,000 b/d] drop of the crude oil flows from [the Gulf Coast to the Midwest.]”

Jakob also noted, “The Brent premium to WTI continues to correct lower. The disappearance of the front rolling WTI contango is not anymore a negative input for passive investments in WTI, while the backwardation in Brent is coming off more rapidly than the backwardation in WTI is increasing. Backwardation back to WTI made the headlines last week, but if the current trend continues, the risk is to see the erosion of the Brent backwardation make even bigger headlines.”

In other news, the latest report by the US Commodity Futures Trading Commission shows money managers sharply increased their net length investment in WTI by 15% on a futures and options combined basis. Zhang said, “The net increase was mainly driven by new fresh long positions, which signals a renewed bullish view on the oil market from money managers. Commercial hedgers’ net short positions declined slightly after both their long and short positions were cut back to the lowest levels for the year. It appears that commercial hedgers had chosen to sit on the sidelines, facing very high market volatility. Meanwhile, swap dealers turned bearish on the oil market, and the net long position of noncommercials as a percentage of total open interest reached the highest level since June.”

Energy prices

The December contract for benchmark US light, sweet crudes dropped 64¢ to $93.32/bbl Oct. 28 on the New York Mercantile Exchange. The January contract lost 58¢ to $93.24/bbl. On the US spot market, WTI at Cushing was down 64¢ to $93.32/bbl.

Heating oil for November delivery declined 3.92¢ to $3.06/gal on NYMEX. RBOB for the same month decreased 5.98¢ to $2.68/gal.

The December natural gas contract bumped up 15.9¢ to $3.92/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 3.7¢ to $3.64/MMbtu.

In London, the December IPE contract for North Sea Brent fell $2.17 to $109.91/bbl. Gas oil for November lost $7.50 to $962.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes inched up 6¢ to $109.15/bbl. So far this year, OPEC’s basket price has averaged $107.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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