MARKET WATCH: Energy prices spike as EU attempts to rescue economy

Commodity and equity prices shot up in world markets June 29 with front-month crude contracts challenging $85/bbl in New York and topping $97/bbl in London after leaders of the European Union announced a new agreement to address their debt crisis.

Under that agreement, bailout funds will go directly to weak banks rather than increase sovereign debts through loans to governments. Bailout funds are to be used “flexibly and efficiently” to stabilize markets for European government bonds. Counties that impose economic reforms required by the EU now can obtain bailouts without submitting to stringent programs. The measures also are aimed at a tighter connection between national budgets, currency, and governments in a new economic union down the line.

The solution is seen as a win for financially troubled Italy and Spain while German Chancellor Angela Merkel came under political fire at home for not hanging tougher in negotiations (OGJ Online, June 29, 2012).

The June 29 across-the-board price rally came just 2 days before the official start of the EU’s boycott of Iranian crude and 5 days from peak US demand for gasoline on the US Independence Day holiday. These factors likely had minimal influence on energy oil prices, however, since most European refineries have shifted away from Iranian crude over the last 6 months and several have shut down operations. Meanwhile, US gasoline stocks are easily sufficient to meet the holiday demand, which is expected to be smaller than similar periods in the past.

Energy prices were lower in early trading July 2 when the Institute for Supply Management trade group of purchasing managers reported its index of manufacturing activity fell in June to the lowest level since July 2009. US factories reported heavy loss of European demand, with exports down to the lowest level since April 2009. This and other reports last week, including reduced consumer confidence in an economic recovery, overshadowed a new report that spending for construction of US homes in May was the largest in 5 months. Residential construction was up 3% to an annual rate of $261.3 billion, indicating a modest recovery.

Energy stocks sag

“After all the equity and commodity turbulence of the past 5 years, one thing has not changed: the energy sector continues to be underweight within the Standard & Poor’s 500 Index relative to its trailing earnings contribution, and in fact the sector's underperformance over the past 18 months has pushed its market cap weighting to a 5-year low,” said analysts in the Houston office of Raymond James & Associates Inc. “In the past, we continually pointed to this underweight as an example of the market's excessive cautiousness and thus a clear opportunity for energy investors, but for once, we think the market is right. Given our below-consensus 2013 forecast for both oil and gas prices, there is no getting around the fact that our 2013 earnings estimates for virtually every energy company we cover are well below Wall Street’s.”

They said, “For the S&P's energy sector in aggregate, we project a year-over-year earnings decline of 24% in 2013, following this year's drop of 18%. Against this backdrop, energy's depressed market cap weighting in the S&P looks reasonable—but not cheap—for the time being. In the long run, after the impending global oil glut works itself out, the resumption of sector rotation into energy stocks is realistic—but not anytime soon.”

In other news, Enrique Pena Nieto of the old the Institutional Revolutionary Party apparently won Mexico’s presidential election July 1, by a yet unofficial count. He’s described as a center-left candidate who is “perhaps surprisingly” pro-reform, endorsing the concept of allowing Petroleos Mexicanos (Pemex) to offer concessions to international oil and gas operators. Nieto’s own party has blocked such reforms in the past. However, that party is thought to have failed in the latest poll to elect a majority in either house.

Energy prices

The August and September contracts for benchmark US light, sweet crudes shot up $7.27 each to close at $84.96/bbl and $85.37/bbl, respectively, on the last trading day for June in the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., also gained $7.27 to $84.96/bbl.

Heating oil for July delivery jumped by 14.41¢ to $2.70/gal on NYMEX. Reformulated stock for oxygenate blending for the same month escalated 11.3¢ to $2.73/gal.

The August natural gas contract rose 10.2¢ to $2.28/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 4¢ to $2.74/MMbtu.

In London, the August IPE contract for North Sea Brent climbed $6.44 to $97.80/bbl. Gas oil for July spiked by $26.75 to $848.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $2.07 to $92.99/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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