MARKET WATCH: Energy prices waffle as crude, gas trend down

Energy prices continued to waffle with the front-month crude contract down 3.1% for the week in the New York market while the West Texas Intermediate-North Sea Brent spread widened to $2.47/bbl July 26, despite an earlier bullish report of declining US inventories. Natural gas fell 6.2% last week.

In Houston, analysts at Raymond James & Associates Inc. reported, “Broader equity markets remained mostly flat, with the Standard & Poor’s 500 Index down 0.4% and the Dow Jones Industrial Average up less than 0.1%.” But falling commodity prices brought the SIG Oil Exploration & Production Index down 1.5% while the Oil Service Index lost 2.5%. Oil futures prices were up in early trading July 29, but gas futures remained in the red.

Commodity Futures Trading Commission data showed speculative length in exchange-traded crude and metals rose last week. “Crude oil and palladium remain crowded trades, and…it will become increasingly difficult to find the marginal buyer in the futures market for these two commodities,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group.

The net speculative length for front-month benchmark crude as a percentage of open interest on the New York Mercantile Exchange stands at 14.9%—“the highest level in more than 5 years and almost double the 5-year average of 7.6%,” De Wet reported. However, he reiterated, “We believe the recent buoyancy in WTI reflects an extrapolation of recent trends in consumer and inventory data (and the inference drawn from this about US gasoline demand over the US driving season), and we feel such buoyancy may be overdone. We would look for both Brent and WTI to ease well below $105/bbl in the coming weeks.

One reason for the recent escalation of the premium on Brent crude is the geopolitical turmoil in Egypt where more than 80 people were reported killed in a July 28 clash between the police and supporters of the ousted President Mohammed Morsi. Conflict in Egypt has “added to a long-standing premium reflecting the market’s fear of war with Iran and a shutdown of the Strait of Hormuz,” Raymond James analysts said. They put the overall premium at $15-20/bbl.

Palestinian leader Mahmoud Abbas met July 29 with Egypt’s interim president in Cairo in a show of support for that government. Meanwhile, Israeli and Palestinian representatives flew to Washington, DC, in an effort to resume peace talks, despite widespread skepticism after 20 years of failed attempts. And there is yet no resolution to the confrontation over Iran’s proposed nuclear program.

“Our view is that the concerns about Iran are generally overblown, but the fear trade regarding Egypt is even more irrational because Egyptian politics do not carry any objective risk to oil supply,” Raymond James analysts said. “There are actual geopolitical supply disruptions taking place such as in Libya and Nigeria over the past 6 months, but ironically, the oil market tends to ignore these outages and focuses instead on the high-impact, low-probability risks that almost never materialize.”

In other news, The Economic Times of India reported natural gas now is flowing into China from Myanmar via a recently completed pipeline and is estimated to satisfy about a quarter of Chinese gas demand. China remains the top investor in Myanmar’s energy sector, though western companies also see an opening following the government's recent political reforms, Raymond James analysts said.

In an interview published over the weekend in the New York Times, President Barack Obama’s sounded “noncommittal” about the proposed Keystone XL pipeline to transport oil from Canada to the US, said Raymond James analysts. “Echoing the concerns of environmentalists, Obama said explicitly that the decision would partly be based on the project’s carbon footprint, and he also rejected arguments that the project would be a major job creator. On the other hand, he said he hopes Canada would ‘be doing more to mitigate carbon release’ (vis-a-vis oil sands production), indicating that environmental steps on Canada’s part could be helpful for securing project approval. He did not specify any timetable for wrapping up the State Department’s review, which would then be sent to the White House for a final decision,” they reported.

Raymond James analysts also cited a Wall Street Journal report that the breakeven basket price for crude sold by members of the Organization of Petroleum Exporting Countries has risen to $105/bbl instead of the $80-90/bbl estimated by the UN’s International Monetary Fund. That’s based on a new study published by Apicorp, a lending group set up by Arab oil producers.

The average price for OPEC’s basket of 12 benchmark crudes decreased 18¢ to $105.10/bbl on July 26. So far this year OPEC’s basket price has averaged $104.99/bbl.

Energy prices

The September contract for benchmark US light, sweet crudes dropped 79¢ to $104.70/bbl July 26 on NYMEX. The October contract lost 46¢ to $104.01/bbl. On the US spot market, WTI at Cushing, Okla., trailed the front-month futures contract down 79¢ to $104.70/bbl.

Heating oil for August delivery continued its decline, down 2.49¢ to $3.01/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, rose 2.74¢ to $3.04/gal.

The August natural gas contract remained in retreat, falling 8.9¢ to $3.56/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.1¢ to $3.59/MMbtu.

In London, the September IPE contract for North Sea Brent was down 48¢ to $107.17/bbl. Gas oil for August retreated $3.25 to $910.50/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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