MARKET WATCH: Oil prices escalate in optimistic markets

Oil prices escalated Aug. 3 with front-month crude jumping 5% to a 2-week high on the New York market following a surprisingly upbeat US jobs report, but natural gas prices continued to dive with forecasts of milder weather in the eastern states.

Equity and oil commodity prices soared when the Labor Department reported the addition of 163,000 jobs in July after 3 months of sluggish hiring. However, the US unemployment rate increased to 8.3% from 8.2% in June.

Meanwhile, valuation of the US dollar depreciated against the euro from $1.217 on Aug. 3 to $1.2439 in early trading Aug. 6, lifting the front-month contract for North Sea Brent above $109/bbl for the first time since the middle of May.

However, Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, reported Aug. 6, “Brent crude has since given up some of its gains and is trading back at $108.20/bbl again. The front month contract may find resistance at the 100-day [moving average of] $108.93/bbl.”

The “extremely strong drawdown in US crude inventories” reported last week by the Department of Energy’s Energy Information Administration “provided some support for oil prices, despite general disappointment in the Federal Open Market Committee,” said De Wet (OGJ Online, Aug. 2, 2012).

“We caution against getting too excited about [the latest] DOE numbers,” De Wet said. “While we don’t feel that there is reason to get bearish on crude oil, we are skeptical about the potential for US crude inventory draws to push West Texas Intermediate significantly above $90/bbl, given the backdrop of a still fragile economic recovery in the US and the consequent weakness in gasoline demand.”

Looking at recent market positioning, De Wet said, “The latest Commodity Futures Trading Commission data indicate that net speculative length fell for the first time in 4 weeks, most likely owing to the shock increase in crude oil and product inventories [in the week ended July 27]. The overall drop of 12.6 million bbl was mostly owing to a 12.5 million bbl decrease in speculative longs, with the 100,000 bbl added to shorts contributing marginally.”

In Houston, analysts at Raymond James & Associates Inc. said, “As crude oversupply moves south, Gulf Coast oil prices will soon follow. The growth in US oil supply has transformed the domestic crude pricing landscape. No longer can we assume that all barrels are priced equally, as exhibited by the emergence of the WTI-Brent spread as well as local pricing differentials (Bakken, Permian, etc.). While the market has been fixated on alleviating the oil glut at Cushing, Okla., many are overlooking the pending oversupply situation that is developing in the US Gulf Coast market. With a wave of incremental crude converging on the Gulf Coast over the next 12-18 months, we believe a structural discount in Gulf Coast (or Light Louisiana Sweet) pricing will develop—sooner (in the first half of 2013) and much wider ($10/bbl LLS-Brent) than many are expecting. With refiners scrambling to chase down the most economic barrel and producers trying to get the best possible price, don't discount the ability of cheap crude to find a home—though clearly, it will be at a cost.” They expect the WTI-Brent spread to average $15/bbl “for the next few years.”

Energy prices

The September contract for benchmark US light, sweet crudes jumped $4.27 to $91.40/bbl Aug. 3 on the New York Mercantile Exchange. The October contract escalated $4.23 to $91.64/bbl. On the US spot market, WTI at Cushing was up $4.27 to $91.40/bbl.

Heating oil for September delivery rose 8.38¢ to $2.93/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 6.14¢, also closing at a rounded $2.93/gal.

The September natural gas contract, however, dropped 4.3¢ to $2.88/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 17.1¢ to $2.92/MMbtu.

In London, the September IPE contract for North Sea Brent climbed $3.04 to $108.94/bbl on Aug. 3. Gas oil for August gained $15 to $923/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up $1.39 to $104.46/bbl. So far this year, OPEC’s basket price has averaged $110.08/bbl.

Contact Sam Fletcher at samf@ogjonline.com

 

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