MARKET WATCH: Energy prices fall amid economy fears

Energy prices fell across the board Oct. 3 with even the natural gas rally taking a flop as fears for the economy shook the markets.

“Reinforced by a dimmed outlook for Chinese fuel demand, West Texas Intermediate and Brent plunged over 4% and 3% [respectively] despite a bullish Department of Energy petroleum inventories report,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas was also down 4%.”

The Oil Service Index declined 2.4%, and the SIG Oil Exploration & Production Index decreased 2.1%, but broader markets eked out gains on positive jobs and service data with the Standard & Poor’s 500 Index up 0.4% and the Dow Jones Industrial Average inching up 0.1%.

Crude prices were undercut by a DOE report US production climbed to 6.5 million b/d—“the highest level in more than 15 years,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “Coupled with the previous day’s weakness in gasoline prices over concerns of increased gasoline supply as East Coast refineries come back on line after maintenance and repairs, the crude oil market has become acutely concerned over a possible glut of US crude oil inventories.”

He said, “The extreme length in noncommercial contracts is exacerbating the situation, as this has left the market vulnerable to swift and aggressive moves to the downside. We maintain that a correction in prices is due as the global supply situation improves (of course, barring any major escalation of the Iranian situation), although the Federal Reserve System’s promise of liquidity and a status quo in current geopolitical risks should limit the downside. We look for Brent to average $105/bbl in the fourth quarter.”

Ground noted, “Perversely, the euro has held its ground after the poor Spanish bond auction [early Oct. 4]. Perhaps participants are hoping that this will encourage the Spanish authorities to accept the bailout—the preferred outcome for easing investor concerns about the region.”

In other news, Turkish military forces shelled targets in Syria Oct. 3-4 following an attack by Syrian government forces that killed five people on Turkey's southern border. “The spillover of Syria's violence into Turkey is not new, but Turkey's swift retaliation indicates that its rules of engagement have changed dramatically following similar provocations by Syria in the earlier days of the Syrian civil war,” Raymond James analysts said. “The NATO secretary general has made it clear that the alliance has no plans to intervene in Syria but is ready to defend member Turkey, [which] has the second-largest army in NATO. As far as oil market implications, Turkey is a small producer (less than 100,000 b/d) but is more important for transporting Iraqi crude to Europe. Syria's production, of course, has already been impacted by the conflict, down to 160,000 b/d in the second quarter from 310,000 b/d in 2011.”

The latest economic data were mixed. The US Department of Labor reported 367,000 new applications for unemployment benefits, 4,000 more than the previous week that was revised higher from an initial reading of 359,000. About 5.09 million people received unemployment aid in the week ending Sept. 15, the latest figures available.

In a separate report, consumer spending slowed in September after buyers wrapped up their back-to-school shopping.

The US Department of Commerce said factory orders fell 5.2% in August, the biggest drop in more than 3 years. Orders for nondurable goods rose 2.2% primarily because of higher gasoline prices.

Average rates on US fixed mortgages hit a new low for the second consecutive week, indicating a possible effect from the Fed’s stimulus efforts. The Fed is spending $40 billion/month to buy mortgage-backed securities and help the housing recovery. Fed officials said they will continue the program until the job market improves. The housing market already had the lowest mortgage rates on record, with sales up for both previously occupied and newly built homes.

US inventories

The Energy Information Administration reported Oct. 4 the injection of 77 bcf of natural gas into US underground storage in the week ended Sept. 28, exceeding the Wall Street consensus for 73 bcf. That raised working gas in storage to 3.653 tcf, up 272 bcf from a year ago and 281 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories dipped by 500,000 bbl to 364.7 million bbl last week, frustrating Wall Street’s consensus for a gain of 1.5 million bbl. Crude stocks remain above average for this time of year, however. Gasoline inventories inched up 100,000 bbl to 195.9 million bbl against expectations of a 500,000 bbl decline. Finished gasoline stocks increased while blending components decreased. Distillate fuel inventories fell 3.7 million bbl to 124.1 bbl, surpassing an anticipated decline of 400,000 bbl (OGJ Online, Oct. 3, 2012).

Energy prices

The November and December contract for benchmark US sweet, light crudes fell $3.75 each to $88.14/bbl and $88.52/bbl, respectively, Oct. 3 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was down by the same amount to match the front-month futures closing at $88.14/bbl.

Heating oil for November delivery continued its decline, down 5.91¢ to $3.07/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dropped 6.97¢ to $2.80/gal.

The November natural gas contract fell 13.6¢ to $3.40/MMbtu, ending a six-session rally on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 1¢ to $3.21/MMbtu.

In London, the November IPE contract for North Sea Brent lost $3.40 to $108.17/bbl. Gas oil for October tumbled $21 to $958.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes retreated $2.24 to $107.08/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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