MARKET WATCH: Demand concerns wipe out early crude price gains

Crude prices rose in early trading Dec. 10 on indications of stronger Chinese imports, but those gains disappeared in a later selloff in the New York market on concerns US demand will fall. The result was a general decline in energy prices.

However, oil prices were up slightly in early trading Dec. 11 ahead of a meeting of Federal Reserve System executives due to general hope they will approve another bond-buying program later this week.

“This morning, we’ve seen some support from a weaker dollar, although once again it is Brent that is benefiting the most,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “Speculation is growing that the Fed will announce further quantitative easing. We expect that this will be the case with the expiring Operation Twist [a program to sell shorter-term securities and buy longer-term bonds to reduce long-term interest rates and encourage borrowing and spending (OGJ Online, June 21, 2012)] replaced by outright bond purchases. Essentially, we foresee an announcement committing to open-ended bond purchases of $45 billion/month, in addition to the $40 billion/month open-ended commitment to buy mortgage-backed securities. Such a move would certainly lift commodity markets on the expectation of continued investor interest.”

Analysts in the Houston office of Raymond James & Associates Inc. noted broader markets continued to gain ground Dec. 10 with the Dow Jones Industrial Average up slightly (0.1%) for the fourth straight session. “The gain came on improved Chinese statistics and with comments from President Barack Obama that he is ‘willing to compromise a little bit’ on the fiscal cliff issues,” they said. Still, Congress has made no progress in compromising on a fiscal federal budget, with the US economy still moving toward the resulting fiscal cliff at the end of this year.

Despite the positive Chinese economic data, crude prices fell Dec. 10 for the fifth straight session (down 0.4%) to the lowest prices in nearly 1 month. Natural gas tumbled 2.5% on warmer than normal weather forecasts. The SIG Oil Exploration & Production Index followed the commodities trading down 1.3% while the Oil Service Index was flat.

The previous upward momentum of West Texas Intermediate prices “has been considerably muted, indicative of continued worries over the strength of the US economy and the negative impact that the impending fiscal cliff might already have had on consumer and investor confidence and consequently expenditure and investment decisions,” said Ground. “The market is struggling to shake off concerns over weakening US crude demand, despite relatively positive macro data out recently. Crude and product inventory data is keeping these demand concerns alive.”

In other news, ExxonMobil Corp. said in its latest long-term energy outlook rapid production growth in the US and Canada will lead to North America becoming a net exporter of oil and gas by the middle of the next decade (OGJ Online, Dec. 11, 2012). The company predicted natural gas will account for 30% of global electricity generation by 2040, up from less than 25% today.

Energy prices

The January contract for benchmark US sweet, light crudes declined 37¢ to $85.56/bbl Dec. 10 on the New York Mercantile Exchange. The February contract decreased 40¢ to $86.10/bbl. On the US spot market, WTI at Cushing, Okla., followed the front-month future contract down 37¢ to $85.56/bbl.

Heating oil for January delivery dipped 1.91¢ to $2.90/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.07¢ but closed essentially unchanged for the third consecutive session at a rounded $2.60/gal.

The January natural gas contract fell 9.1¢ to $3.46/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.8¢ to $3.63/MMbtu.

In London, the January IPE contract for North Sea Brent gained 31¢ to $107.33/bbl. Gas oil for December lost $2 to $903.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 26¢ to $105.01/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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