MARKET WATCH: Pessimistic indicators undercut energy prices

Energy commodity prices were still falling Dec. 7 with front-month crude down 3.4% for the week and natural gas essentially flat in the New York market as political stalemate over the fiscal federal budget continued.

“Investors have felt the pressure the last few weeks in the absence of an imminent deal to avoid automatic spending cuts. Equities were moved by fleeting optimism of a deal in the second half of last week, ending flat to modestly up on the week,” said analysts in the Houston office of Raymond James & Associates Inc.

The latest Commodity Futures Trading Commission numbers show net speculative length for benchmark crude in the New York market increased 13.1 million bbl—“an overly confident move, in our opinion,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. Nevertheless, he said, “The futures market looked decidedly bullish, with 6.6 million bbl added to speculative longs and an equal amount unwound from short positions. Length seems excessive, especially amid the uncertainty of the fiscal cliff and the possible deleterious effects on the US economy. This explains the acute sensitivity of late that oil market participants seem to have to any news or data release that might suggest a deterioration in the global (in particular the US) economy.”

Ground said, “This ultra-sensitivity was evident in Friday’s reaction to better-than-expected non-farm payrolls and then the underwhelming US consumer confidence reading. While the payrolls data was encouraging (also showing no discernible effect of Hurricane Sandy), the University of Michigan consumer confidence index erased the gains of the past 3 months, the clearest indication we’ve had as yet of the negative impact the fiscal cliff saga is having on households. With a resolution of the fiscal cliff most likely, albeit at the 11th hour, this undermining of consumer and business confidence to our mind is already hurting the fragile US economy.”

In other news, Raymond James analysts said, “Despite relatively subdued global product demand, years of economically driven refining capacity shutdowns and run cuts (largely centered in Europe and on the US East Coast) left the global refining picture fairly balanced during the first half of 2012, with the Organization for Economic Cooperation and Development product inventory levels tracking well below 5-year lows. Beginning this past summer, the picture quickly tightened due to a series of unplanned refinery outages (namely US Gulf, West Coast, and Venezuela), combined with a heavy refinery maintenance season (particularly in Europe) altogether driving Atlantic Basin crack spreads to highs not seen since 2005-06. Alas, the onset of winter has brought global crack spreads back down to seasonal norms, and investor focus has now shifted towards the next wave of new projects threatening to tip the refining market towards overcapacity.”

They said, “Once again, a healthy dose of capacity rationalization will be needed in order to stave off overcapacity and support global crack spreads.” Against this cautionary global refining backdrop, however, Raymond James analysts maintain a “positive view on US refining fundamentals, which continue to sit at a huge cost-advantaged position resulting from the disconnect in domestic crude (and natural gas) prices.”

Energy prices

The January contract for benchmark US light, sweet crudes decreased 33¢ to $85.93/bbl Dec. 7 on the New York Mercantile Exchange. The February contract declined 35¢ to $86.50/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 33¢ to $85.93/bbl.

Heating oil for January delivery slipped 2.79¢ to $2.92/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.05¢ but closed essentially unchanged at a rounded $2.60/gal.

The January natural gas contract fell 11.5¢ to $3.55/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 4.8¢ to $3.34/MMbtu.

In London, the January IPE contract for North Sea Brent dipped 1¢ to $107.02/bbl. Gas oil for December dropped $7.75 to $905.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 89¢ to $104.75/bbl. So far this year the OPEC basket has averaged $109.64/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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