MARKET WATCH: Oil prices rise as markets ignore fundamentals, economic danger signs

Crude oil prices registered small gains Sept. 10 as traders ignored ample supply amid more signs of a flagging world economy and instead focused their hopes on the 2-day meeting of US Federal Reserve System executives to open Sept. 12.

“Crude oil markets traded in a tight $1/bbl range as market participants appeared to be waiting on the sidelines,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “There seemed to be some unease creeping into the market, particularly concerning the Euro-zone.”

He said, “We expect much of the same lackluster activity today. Perhaps in the absence of any major economic data flow the market could pay more attention to US trade data [released Sept. 11] although we doubt that this will prompt much activity.” It is becoming “increasingly evident that oil market participants remain stuck between concerns over the dire consequences for demand should the US economy be faltering and the more optimistic view of a weaker US economy inevitably leading to further quantitative easing,” Ground said.

In Houston, analysts at Raymond James & Associates Inc. said, “Despite recent oil price strength, fundamentals suggest oil prices are still poised for a dive. While the potential for an Iranian conflict and government stimulus speculation have supported near-term oil prices, we still believe oil market fundamentals are going to dramatically deteriorate over the next 6 months or so. After tweaking our oil supply-demand numbers, we remain convinced oil prices will need to fall early next year; therefore, we are maintaining our 2013 oil price deck: $65/bbl for West Texas Intermediate and $80/bbl for Brent. Our bearish oil view is predicated on rising US oil supplies combined with a stagnant global economy that should lead to a glut of oil over the next 12-18 months.”

Despite previous disappointments, many still hope the Fed will do something to stimulate the economy. The German Constitutional Court also is expected to rule Sept. 12 as to whether Germany can legally participate in the financial bailout of other European countries to preserve the euro. Speculation on both events helped buoy markets in early trading Sept. 11 despite an announcement by Moody's Investors Service that it likely will downgrade the US government’s debt rating by at least one notch if Congress can’t reach a compromise soon in budget negotiations. Failure for Congress to reach agreement will automatically trigger $1.2 trillion in tax increases and spending cuts that some say will trigger another recession and increase unemployment.

Last year, Moody’s initiated a negative outlook for the US debt rating during congressional budget conflict that almost put the government in default. The congressional dispute at that time also prompted Standard & Poor's to reduce its AAA rating for US government bonds while Fitch Ratings threatened a potential downgrade. The stock market dropped when Moody’s issued its negative evaluation in 2011, but major market indexes were modestly higher immediately after its latest announcement.

Meanwhile, the US Department of Commerce reported US exports to Europe fell 11.7%. Total US exports were down 1% to $183.3 billion due to reduced sales of autos, telecom equipment, and heavy machinery.

The US Department of Labor said US job openings dropped to a seasonally adjusted 3.67 million in July from 3.72 million in June, indicating US hiring may remain weak for months. The Associated Press reported 12.8 million people were unemployed in July “meaning 3.5 people were competing for each open position.”

In other news, the US Bureau of Safety and Environmental Enforcement said at midday Sept. 10, workers had not yet returned to 2 of the 596 manned platforms and 1 of the 76 rigs in the Gulf of Mexico, most of which were evacuated ahead of Hurricane Isaac. Government officials said 7.98% of daily oil production and 6.11% of daily natural gas product from federal leases in the gulf remain shut in.

Energy prices

The October contract for benchmark US sweet, light crudes rose 12¢ to $96.54/bbl Sept. 10 on the New York Mercantile Exchange. The November contract advanced 13¢ to $96.88/bbl. On the US spot market, WTI at Cushing, Okla., matched the front-month crude futures contract, up 12¢ to $96.54/bbl.

Heating oil for October delivery increased 1.79¢ to $3.17/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.44¢ but closed essentially unchanged at a rounded $3.02/gal.

The October natural gas contract regained 13¢ to $2.81/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued to fall, down 5.5¢ to $2.68/MMbtu.

In London, the October IPE contract for North Sea Brent gained 56¢ to $114.81/bbl. Gas oil for September increased $2.75 to $988.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes rebound by 77¢ to $112.32/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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