MARKET WATCH: Energy prices up slightly on flat jobs report

Energy commodities mostly registered small to moderate price increases Nov. 4 after the US Department of Labor reported little change in the number of unemployed US job seekers (13.2 million) and the unemployment rate (9%).

The Bureau of Labor Statistics said nonfarm payroll employment continued to trend up in October (an increase of 80,000), with modest job growth continuing in professional and business services, leisure and hospitality, health care, and mining, which includes oil and gas exploration. Government employment continued to trend down. The unemployment rate has remained at 9-9.2% for many months.

At least total US unemployment isn’t increasing, “unlike in Europe,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “France announced over the weekend that it will embark in 2012 in its greatest budgetary control since 1945 while [at the Group of 20 meeting in Cannes] Italy was forced to have the [United Nations’] International Monetary Fund monitor its budgetary measures,” he said. “Unemployment in Europe has been rising during the third quarter, and we expect the trend to continue.”

Meanwhile, the Greek government came unraveled. “Last night, Greece decided to form an interim unity government and that Prime Minister [George] Papandreou will step down. After a tumultuous few months that culminated last week when Papandreou called for a referendum on the bailout package for Greece, it seems that the new government's first priority will be to win approval of a bailout package with Euro-zone leaders. It still remains to be seen who will lead the new party, although indications are pointing to former European Central Bank (ECU) Vice-Pres. Lucas Papademos,” said analysts in the Houston office of Raymond James & Associates Inc.

This week, they said, all eyes are on Italy, which may become the next Euro-zone debt victim. Italian Premier Silvio Berlusconi is under intensified pressure to resign in hopes a new government can fend off financial disaster in that country. The Associated Press reported, “Unlike Greece, Ireland, and Portugal—the three countries that Europe has already bailed out—Italy's economy could be too large to rescue.”

In a recent l'Institut Francais d'Opinion Publique poll, a third of French respondents were in favor of abandoning the euro to return to the French franc—“a ratio that climbs to 50% in the categories of factory workers,” said Jakob. “Greece will continue to attract attention, but with China refusing to contribute to the European Financial Stability Facility, we are already past the Greek crisis and we have started to enter the Italian crisis. Despite the ECB buying Italian bonds, the yields on the 10-year Italian bonds have risen above 6.3%, and the spread of Italy to German 10-year bonds are at a record high 4.5%.”

In New York, Raymond James analysts reported, “The broader markets ended last week slightly lower, with the EPX [SIG Oil Exploration & Production Index] down 1% and OSX [Oil Service Index] down marginally.”

Jakob said, “The Standard & Poor’s 500 Index had its first negative week out of the last 5; it lost 2.48% during the week and is now down 0.35% for the year, while the NASDAQ lost 1.86% for the week and is still positive for the year at 1.25%. Most of the losses during the week came from the financial sector, while the energy sector lost 2.3%.” For the year, the financial sector is down 16.8% while energy is up 4.4%, he said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said “Oil prices will likely keep tracking the uncertainty of the macroenvironment, defying the very tight fundamentals. Volatility is therefore likely to stay elevated. The Brent crude price is again testing the resistance of the well-established downward channel as the contract has been traded in a fairly narrow range for more than 3 weeks. A technical break-out is needed for a sustained rally in Brent. Across the barrel, we favor middle-distillates despite the very strong rally during the past month, but we take a bearish view towards light and heavy products.”

Paul Horsnell, managing director of Commodities Research at Barclays Capital in London, said, “While the oil market has proved to be relatively resilient to the latest phase of concern about macroeconomic outcomes and particularly potential discontinuities from sovereign debt outcomes, that macroeconomic fear is still holding oil prices down. Simultaneously, there have been a series of new or enhanced geopolitical risks for the oil market, which is already operating at a high upstream capacity utilization rate at a time of tight physical markets. The risk of a sharp upwards move in oil prices appears to be growing, and as a result we consider the current price equilibrium to be a potentially unstable one.”

He noted, “Backwardation has become the norm again in oil markets, with the move spreading to West Texas Intermediate over the past couple of weeks. The market is sending a signal to realize inventories into the prompt market in order to find balance, rather than providing an incentive to take oil into storage and remove short-term surplus. With that surplus now well gone, market incentives have changed accordingly.”

Energy prices

The December contract for benchmark US light, sweet crudes increased 19¢ to $94.26/bbl Nov. 4 on the New York Mercantile Exchange. The January contract advanced 28¢ to $94.19/bbl. On the US spot market, WTI at Cushing, Okla., was up 19¢ to $94.26/bbl, in step with the front-month futures contract price.

Heating oil for December delivery gained 3.26¢ to $3.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.16¢ to $2.66/gal.

The December natural gas contract inched up 0.5¢ to $3.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to slip lower, down 0.2¢ to $3.41/MMbtu.

In London, the December IPE contract for North Sea Brent climbed $1.14 to $111.97/bbl. Gas oil for November rebound by $13.50 to $969.50/tonne.

The Organization of Petroleum Exporting Countries’ offices in Vienna were closed Nov. 7, so there was no update on the basket price of the group’s 12 benchmark crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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