MARKET WATCH: Stock market, crude oil prices tumbled

The stock market tumbled Nov. 9 in its worst session in nearly 2 months, with front-month crude and natural gas futures prices in New York following the broader market down by 1.1% and 2.5%, respectively, due to continued financial turmoil in Europe.

However, equity and commodity prices were up in early trading Nov. 10 after Italy sold $6.8 billion in bonds at better-than-expected rates and Lucas Papademos, former vice-president of the European Central Bank, was named prime minister of an interim Greek unity government.

The US Department of Labor also reported Nov. 10 initial applications for unemployment benefits fell last week to a seasonally adjusted 390,000—the lowest number since April and below economists’ expectations of 400,000 applications. Such data suggest to some that unemployment is easing, but others caution that it does not reflect the number of unemployed workers who have used up their benefits or those who have given up hope and dropped out of the job market. Meanwhile, the US unemployment rate hovers around 9%.

In other news, Italian economist Mario Monti is said likely to replace Premier Silvio Burlusconi in that financially strapped country.

However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “What we find more worrying than the numbers is that we have the feeling that the European Union leaders are starting to give up on the idea of Europe as it stands. We have not gone through credit crunch similar to 2008 yet, but we need to remain ready for such an event.”

The Belgium bank Dexia SA and the bankrupt MF Global brokerage firm in New York “have already fallen victim to the lack of firewalls in Europe, and we need to assume that there are some big guns out there starting to suffer more on their European sovereign debt positions or engaging in funny accounting,” Jakob said. “Furthermore we have not yet gone through the episode of France losing its AAA [credit rating] status (given the extent of the European crisis it is for us hard to see how France can sustain a better rating than the US).”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reiterated, “The oil market is caught between a tight physical market and an uncertain macro environment. As the Euro-zone debt crisis deepens, oil market volatility will remain high. Also, shaky sentiment has been keeping the oil price under downward pressure.” He expects the tight physical market to keep prices “firmly in backwardation” until yearend.

Jakob said, “One of the arguments in favor of high oil prices has been the price needed to balance the Saudi budget after the spending drive triggered by the fear of a spill-over of the Arab spring. According to different estimates that we have seen, we come down to an average of about $85/bbl on a Dubai basis to balance the 2011 budget.”

So far this year, he said, “The average price for Dubai has been running significantly higher than that level and export levels were strong as well, which means that Saudi Arabia will end up with a significant budget surplus in 2011. In other words, given that crude oil prices have been in 2011 $20/bbl above the level required for the Saudi budget, the kingdom could in theory afford to see Brent at $70/bbl and still be within the budget constraints over a 2-year period. We can leave a bit of room in the price target to compensate for lower exports, but one way or another Saudi Arabia could in our opinion afford to have Brent trade on average at $80/bbl next year while still meeting its budgetary needs and allowing at the same time a bit of breathing rooms for the economies of its partners in the [Group of 20 largest economies].”

Zhang observed, “Global oil demand has grown at a moderate and stable pace in 2011. However, for different product groups, growth varies: Middle-distillate has had strong growth, but gasoline and fuel oil weak growth. This demand divergence has created a huge gap between the gasoline crack and middle-distillate crack. As a result, refining margins were poor in the third quarter, which kept the fuel oil crack supported by low refinery throughput.”

Headed into winter in the northern hemisphere, Zhang said, “Seasonal demand changes, specifically demand increases in gas oil but declines in gasoline, will further exacerbate this divergence. We expect the ICE gas oil crack over Brent to hit $20/bbl this winter, with the potential to spike further in the event of really cold weather. However, we do not foresee a middle-distillate crunch as severe as in the first half of 2008 when the crack hit $40/bbl.”

US inventories

The Energy Information Administration reported the injection of 37 bcf of natural gas into US underground storage during the week ended Nov. 4, above Wall Street’s consensus for a 31 bcf increase. That raised working gas in storage above 3.8 tcf—6 bcf below the year-ago level but 214 bcf above the 5-year average.

EIA earlier said commercial inventories of US crude dropped 1.4 million bbl to 338.1 million bbl in the week ended Nov. 4, compared with a Wall Street consensus for a 500,000 bbl increase. Gasoline fell 2.1 million bbl to 204.2 million bbl in the same period, counter to market expectations of a 1 million bbl build. Distillate fuel inventories plummeted 6 million bbl to 135.9 million bbl, far surpassing the market’s outlook for a 2.2 million bbl decline, EIA said (OGJ Online, Nov. 9, 2011).

Jakob said, “Overall, the US suffered a very significant stock draw…. The total comes to [a decline of] 15 million bbl, which is much higher than what was indicated by the American Petroleum Institute (OGJ Online, Nov. 5, 2011).”

Energy prices

The December contract for benchmark US sweet, light crudes traded at $94.54-97.84/bbl Nov. 9 on the New York Mercantile Exchange before closing at $95.74/bbl, down $1.06 for the day. The January crude contract on NYMEX and WTI at Cushing, Okla., on the US spot market also dropped by $1.06 each to respective closings of $95.64/bbl and $95.74/bbl.

Heating oil for December delivery declined 1.75¢ to $3.10/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 6.22¢ to $2.64/gal.

The December natural gas contract lost 9.3¢ to $3.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued climbing, up 7¢ to $3.51/MMbtu.

In London, the December IPE contract for North Sea Brent fell $2.69 to $112.31/bbl. Gas oil for November rose $4.25 to $998.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 66¢ to $113.13/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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