Oil prices roiled by data

Oil prices fluctuated widely in mid-September as analysts and traders tried daily to interpret market indicators from a flood of economic data. The result was an energy market responding to hopes and fears more than the fundamentals of supply and demand.

The front-month crude contract price in the New York futures market dipped slightly Sept. 12, ending a seven-session rally, as the euro hit a 4-month high against the US dollar. Crude prices escalated Sept. 13 when US Federal Reserve officials announced an open-ended plan to buy $40 billion of mortgage securities each month until the economy improves. They also announced a third round of quantitative easing (QE3) designed to keep interest rates at record lows through mid-2015.

For nearly 4 years, the Fed has used similar programs to hold its benchmark short-term interest rate near zero while it bought more than $2 trillion in Treasurys and mortgage bonds to reduce long-term rates. Several business analysts and economists have complained QE1 and QE2 were not nearly as effective as the Fed originally projected, and they don’t expect the latest effort to do any better. Even Fed Chairman Ben Bernanke acknowledged the latest program is no panacea for slow economic growth and high employment that are likely to continue through next year. But investors wanted the Fed to do something to stimulate the economy.

Buoyed by the Fed plan, oil prices kept climbing with the front-month crude contract temporarily topping $100/bbl Sept. 14 before closing at $99/bbl on the New York market. Crude appeared to be holding in that range in early trading Sept. 15, with the US dollar still near a 4-month low against the euro.

Market surprise

Then out of the blue, front-month crude dropped 2.4% Sept. 17 in the New York market for no apparent reason. Both Brent and West Texas Intermediate fell several dollars within minutes. Some blamed the selloff on rumors of an imminent release of oil from the US Strategic Petroleum Reserve. Many have speculated just such a release will occur to drive down oil prices prior to the presidential election. But President Barack Obama’s administration quickly announced it had made no decision.

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said at the time, “The obvious culprit is some kind of technical trading glitch or a ‘fat finger’ error, which the Commodity Futures Trading Commission and IntercontinentalExchange Inc. are now investigating.” Usually such technical glitches or trader errors see an equally quick recovery in market prices. But there was no immediate recovery this time.

Whatever the reason for the selloff, Ground said, “It does highlight the vulnerability of crude oil markets.” He said, “The situation in Iran, together with the Fed’s additional monetary accommodation, should keep the crude oil market well supported. However, we remain cognizant that the supply situation looks to be improving and [there is a] very real risk of an SPR release, given persistently elevated product prices.”

Front-month crude dropped another 1.4% Sept. 18 after Saudi Arabia said it had hiked production and would raise it further should demand increase. But that’s been the Saudis’ longstanding policy.

In other news, Iran Oil Minister Rostam Qassemi said his country's crude exports are rebounding from the European Union embargo, having found means for insuring tankers carrying Iranian crude to Asian markets.

Oil price losses accelerated Sept. 19 after the Energy Information Administration reported US crude inventories jumped 8.5 million bbl to 367.6 million bbl in the week ended Sept. 14, far exceeding the Wall Street consensus for an increase of 1 million bbl. “This, coupled with high product prices, has heightened concerns over demand destruction in the US,” said Ground. Crude prices gained some support early in that session, but it dissipated as the dollar strengthened against the euro and Euro-zone worries once again took hold of the market.

Aside from a 0.11% dip in the expiring October US crude contract, other energy commodities registered small gains Sept. 20, ending the 3-day selloff that had slashed crude prices by 7% in the New York market. Momentum slowed “with not much data flow or news to push the market in any particular direction,” Ground noted.

All energy commodities posted small to moderate gains Sept. 21. Brent rebounded more than WTI, “possibly because oil is seen as a hedge against inflation after the US Fed and the Bank of Japan announced stimulus measures,” said analysts at the Centre for Global Economic Studies, London.

(Online Sept. 24, 2012; author's e-mail: samf@ogjonline.com)

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