MARKET WATCH: Oil prices fall with stronger dollar, rising interest rates

Energy prices and equity markets fell June 20 with front-month crude dropping 3% and front-month natural gas down 2.1% in the New York market despite bullish economic indicators.

The Standard & Poor’s 500 Index dropped 2.5% in its biggest 1-day loss since November 2011. “The broader index was down over 2% on the week as investors weighed the Federal Reserve Bank's recent comments against the possibility that higher [interest] rates could present headwinds for the economic recovery,” said analysts in the Houston office of Raymond James & Associates Inc.

The SIG Oil Exploration & Production Index fell 4%, while the Oil Service Index dropped 2.2%. “While no major economic data is expected today, early trading suggests that some investors believe yesterday's drop was oversold,” Raymond James analysts reported June 21.

“Oil markets suffered under the weight of persistent dollar strength and rising interest rates,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

Other Standard Bank Group analysts said, “The Fed and liquidity trouble in the China interbank market have sapped commodity prices. Developments in the US and China once again brought to the fore the importance of monetary policy on commodity prices, at least in the short term. However, where the action of the Fed has largely been expected, or at least been talked about in financial markets for some while now, the developments in the China interbank market hold the greatest risk due to the unfamiliarity to the markets.”

Standard Bank analyst Steve Barrow said the Fed is the central bank most important to the global economy. “This is not to deny China’s importance in the provision of global liquidity,” he said. “China is important because its super-fast reserve accumulation has resulted in massive reserve recycling, much of it into US treasuries, which has pushed yields down and so encouraged looser monetary conditions both in the US and on a global basis. However, this was more of a factor in the pre-crisis era; the period between 2000 and 2008. Since the credit crunch, reserve growth has generally been slower, and there seems to have been much more reserve diversification into assets other than treasuries.”

China also is important to the world economy in another sense—“its unpredictability,” Barrow said. “For while the Fed might have become super-transparent, the PBOC has not. Hence, when we see the sort of liquidity squeeze that pushes the key 7-day repo [repurchase] rate [at which the central bank lends short-term money to other banks against securities], the market is not sure what the PBOC is up to. Market players have some idea that the authorities want to crack down on certain financial practices, such as those undertaken by the shadow banking sector or exporters that over-invoice. But, what the market lacks is clear guidance as to how far this clampdown will go, whether it will last and whether it could be the start of a more significant clampdown that could include things like official rate hikes in the future.”

He said, “The problem for global financial markets is that the [US] central bank controlling the biggest economy in the world tells us its likely next step well in advance, while the bank in control of the second largest economy seems to almost be enjoying the fact that it might have wrong-footed the domestic money markets. So, while there might be no disagreement that the Fed is the most globally important of the two central banks, it is the lack of transparency at the PBOC that gives China this extra significance. Most probably next month will see liquidity strains ease in China and money market rates will be able to return to more normal levels. But these periods of uncertainty and volatility breed unease in local money markets. This might well be the PBOC’s intention as it seeks to penalize those that misbehave. But it’s in contrast to the Fed, which seems to be working overtime not to levy undue pain.”

US inventories

The Energy Information Administration reported the injection of 91 bcf of natural gas into US underground storage in the week ended June 14, above Wall Street’s consensus for an injection of 89 bcf. That brought working gas in storage to 2.438 tcf, down 559 bcf from the comparable period a year ago and 47 bcf below the 5-year average (OGJ Online, June 20, 2013).

Excluding weather-related demand, 3.9 bcfd of gas were added to storage last week compared with a year ago. “We have averaged 4.5 bcfd looser over the past 4 weeks,” Raymond James analysts said. “With a potential heat wave expected across the US, we fully expect that prices will sustain the $4/Mcf level. In addition, we continue to forecast growing production as easing infrastructure constraints will be the impetus for higher production and keep prices at $4/Mcf level through 2014.”

Energy prices

The July contract for benchmark US light, sweet crudes dropped $2.84—“the largest dollar loss of the year,” Ground reported—to $95.40/bbl June 20 on the New York Mercantile Exchange. The August contract fell $3.34 to $95.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.84 to $95.40/bbl.

Heating oil for July delivery lost 10.03¢ to $2.87/gal on NYMEX. Reformulated stock for oxygenate blending for the same month surrendered 10.52¢ to $2.79/gal.

The July natural gas contract declined 8.6¢ to $3.88/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 4¢ to $3.90/MMbtu.

In London, the August IPE contract for North Sea Brent registered what Ground said was the lowest closing since January 2011, down $3.97 to $102.15/bbl. Gas oil for July fell $22 to $875.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped $2.38 to $101.40/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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