MARKET WATCH: 'Super committee' flops; equity, energy prices fall

Equity and commodity markets were under heavy pressure Nov. 21 as the Congressional “super committee” announced its failure to agree on a $1.2 trillion reduction of the US budget deficit after weeks of wrangling, citing “ideological differences.”

That and continuing European debt concerns contributed to a 2% decline in the Dow Jones Industrial Average. Energy stocks followed suit as the Oil Service Index and SIG Oil Exploration & Production Index retreated 2.7% and 2.3%, respectively. “Crude closed the session down 0.5% [in New York] on the debt concerns and a strengthening dollar,” said analysts in the Houston office of Raymond James & Associates Inc.

However, James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted, “The oil price lost over $3/bbl intraday but recovered most of these losses in later trading on rising geopolitical tensions.” He said, “Gasoline outperformed the oil complex, while middle-distillates and fuel oil were lagging. The West Texas Intermediate structure weakened slightly in anticipation of an inventory build at Cushing, Okla. In contrast, the Brent structure was firmer.”

Following termination of the super committee’s negotiations, Moody's Investors Service, Inc. affirmed its AAA credit rating for the US government while maintaining its negative outlook. Standard & Poor’s said it would keep the government’s credit rating at AA+. “The wait-and-see approach adopted by the rating agency is likely to avoid any knee-jerk reaction in the market as seen in August, after S&P stripped the US of its top AAA rating,” said Zhang.

Meanwhile, natural gas gained 2.4% in the New York market on forecasts for colder weather in weeks ahead. Broader market, crude, and gas futures prices were higher in early trading Nov. 22.

The Department of Commerce said the US economy expanded at an annual rate of 2% in the third quarter, down from its previous estimate of a 2.5% gain. Government officials also reported after-tax incomes fell by the largest amount in 2 years, the result of high unemployment and less pay raises.

Middle East tensions

In other news, Zhang reported, “After a relatively quiet few weeks since the Libya civil war, tensions in the Middle East and North Africa region rose again, with the focus on Iran this time. A few Western governments announced further sanctions on Iran yesterday. Iran is a much bigger oil producer, with over 3.5 million b/d oil production, or twice Libya’s capacity. Furthermore, Iran holds a more critical strategic location, in particular the Strait of Hormuz. The Syria situation is still heated, while the violence in Egypt over the weekend signals political transition challenges.”

Looking ahead, he said, “The Euro-zone debt crisis will keep oil market volatility elevated. The US gross domestic product data due today is likely to give some relief but unlikely to prompt a strong rally. We also expect the Federal Reserve’s Federal Open Market Committee minutes to lean towards further policy easing, which should also give some support to the oil market. The physical crude market shows some signs of easing as the Brent structure continues to weaken. However, low oil inventories globally are likely to keep oil in backwardation, albeit not as steep as a few weeks ago. We only look for a substantial downside move in the oil flat price when the term structure is firmly in contango.”

OPEC meeting

Despite the tightening oil market and high oil prices, Zhang expects no major change in production quotas at the Organization of Petroleum Exporting Countries’ Dec. 14 meeting in Vienna. “The last meeting held in June ended with a fierce divide over production quotas, with Saudi Arabia and Kuwait advocating a production increase but being held back by the other members. Consequently, no changes to production quotas were made. In response, the International Energy Agency released 60 million bbl [of crude and petroleum products] from its member countries’ strategic reserves at the end of June.” A repeat of the IEA action is not expected this time.

Zhang pointed out, “Saudi Arabia and Kuwait, the two members that have the most of OPEC’s spare capacity, have been increasing production to meet demand since Libya’s supply was halted by its civil war. In fact, Saudi’s crude oil production has surpassed its record of 2008.”

Moreover, he said, “Global macroeconomics have deteriorated further since the last OPEC meeting in June: China’s economy is slowing down, and there is a significant risk of a Euro-zone recession. China is unlikely to reverse its policy tightening in the near term, and the Euro-zone debt crisis seems interminable. Under these circumstances, OPEC would probably be unwilling to put further downward pressure on oil.”

In the near term, he said, “The global economy will have to contend with high oil prices and high volatility. Global oil inventories are set to decline further, thereby keeping the backwardated structure in place and posing the risk of short-term price spikes.”

Energy prices

The new front-month January contract for benchmark US sweet, light crudes traded at $95.24-97.86/bbl Nov. 21 on the New York Mercantile Exchange before closing at $96.92/bbl, down 75¢ for the day. The February contract dropped 64¢ to $96.99/bbl. On the US spot market, WTI at Cushing was unchanged at $97.41/bbl.

Heating oil for December delivery continued its decline, down 3.82¢ to $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, bounced back 1.06¢ to $2.50/gal.

The December natural gas contract regained 8.3¢ to $3.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 8.6¢ to $2.93/MMbtu.

In London, the January IPE contract for North Sea Brent continued its retreat, down 68¢ to $106.88/bbl. Gas oil for December fell $23.50 to $949.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes was down $1.38 to $107.74/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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