MARKET WATCH: Greek referendum killed; oil prices rise

The Greek prime minister canceled a proposed referendum on the austerity programs in that troubled country, causing prices to climb in commodity and equity markets.

“Relief that the euro may yet live to see another month, as well as an unexpected cut to Euro-zone interest rates, sent the broader markets up 2%. Oil wasn't far behind, and gained 1.7% to close at a 2-month high” on the New York market, said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas rose nearly 1% despite a storage build above expectations.”

In Zug, Switzerland, Olivier Jakob at Petromatrix said, “The turn-arounds of the Greek prime minister are so rapid that it is becoming useless to comment on Greece. We are getting to the saturation point where the market will start discounting the noise coming out of that country; but that does not reduce the risk. Referendum or elections, one way or another the next headline will be that the country does not have any ink to print the ballots (if only we were joking).”

He said, “While Greece will continue to make some noise today, dwarfing the media impact of the G-20 [Group of 20 major economies] meeting, we need to continue looking past Greece and maintain a focus on the Italian bond yields. Italy is currently having the same yields on its 10-year bonds that Greece had in the first quarter of 2010, and that is not something enjoyable.”

Despite the happy face President Barack Obama tried to paint on it, the G-20 meeting in Cannes failed to agree to boost the ability of the International Monetary Fund to reduce the European debt crisis. They did agree something needs to be done as political turmoil in Greece and the teetering economy in Italy, now under IMF supervision of its economic reforms, overshadowed their meeting.

Finance ministers, who now must work out how to boost IMF resources, are to meet Nov. 7. G-20’s next scheduled summit is in February.

So far, no countries outside the Euro-zone—including the US—have offered to contribute to the bailout fund. The Associated Press reported the IMF may issue additional special drawing rights, or SDRs, the fund's own reserve currency that can be exchanged for cash with central banks around the world. SDRs do not require new commitments from IMF member states.

The IMF previously was dominated by western powers, but the influence of China, Brazil, and Africa has grown in recent years, and they may be more reluctant about investing in Europe.

Meanwhile, the Labor Department reported 80,000 jobs were added in October, with the unemployment rate declining to 9% from 9.1%; the rate has remained around 9% for more than 2 years.

The Federal Reserve earlier reduced its economic growth forecast to 1.7% for this year from 2.7% previously.

Mario Draghi, the Italian banker and economist who this month succeeded Jean-Claude Trichet as president of the European Central Bank, cut the interest rates by 0.25% to 1.25% because of a pending “mild recession” in the Euro-zone. “Given that the inflation rate is still way above the ECB target rate, the earlier-than-expected rate cuts is a recognition of the worsening conditions in the Euro-zone,” Jakob said.

He said, “The yields on the euro are now lower for a risk which is not really reduced, but that did not prevent the euro from strengthening. When the US Federal Reserve lowers rates, it weakens the dollar; when the ECB lowers rates, it [also] weakens the dollar. The thinking might be that if the ECB starts to lower rates, then this increases the chance of Bernanke triggering a third round of quantitative easing.”

In the oil market, James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Refining margins fell as cracks for gasoline and middle-distillates were both softer, in anticipation of high refinery runs towards the end of the autumn maintenance season. Brent structure remains strong on low inventories, while West Texas Intermediate is holding firmly to its newly found backwardation.”

He said, “Oil prices will likely keep tracking the uncertainty of the macro-environment, defying the very tight fundamentals. Volatility is therefore likely to stay elevated. Furthermore, oil prices are likely to remain heated—unless demand collapses. 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.”

In other news, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Iraq's oil production and exports are up sharply since the beginning of the year, just in time to replace Russian exports that could be in danger of slipping as output there starts to flatten at a time when domestic consumption use expands. For as long as world growth remains above 3%, we believe oil market fundamentals will remain relatively strong.”

Snowstorms in much of the US last week were “a reminder that we are heading into winter—a potentially colder-than-normal one according to our meteorologists,” he said. “Given the low level of gas oil inventories, we expect this is likely to prove supportive for the gas oil complex. Adding further support are indications that consumers in Europe have yet to build inventories even though peak winter is only a matter of weeks away.”

US gas storage is forecast to reach a peak of 3.875 tcf in mid-November followed by a late-March bottom at 2 tcf “that could be lower with a colder-than-normal winter or to a pick-up in industrial production. This may encourage further price advances,” Sieminski said.

The Energy Information Administration reported the injection of 78 bcf of natural gas into US underground storage in the week ended Oct. 28, up from the Wall Street consensus for a 70 bcf input. That raised the amount of working gas in storage to nearly 3.8 tcf. Stocks now are 17 bcf less than in the comparable period last year and 201 bcf above the 5-year average (OGJ Online, Nov. 2, 2011).

Energy prices

The December and January contracts for benchmark US sweet, light, sweet crudes increased $1.56 each to $94.07/bbl and $93.91/bbl, respectively, Nov. 3 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was up $1.56 to $94.07/bbl.

Heating oil for December delivery rebound 3.74¢ to $3.04/gal on NYMEX, wiping out the previous session’s loss. Reformulated blend stock for oxygenate blending for the same month continued climbing, up 1.46¢ to $2.64/gal.

The December natural gas contract regained 2.9¢ to $3.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 1¢ to $3.42/MMbtu.

In London, the December IPE contract for North Sea Brent escalated $1.49 to $110.83/bbl. Gas oil for November dropped $5.25 to $956/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes continued to seesaw, down 70¢ to $107.95/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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