Sam Fletcher
Senior Writer
HOUSTON, Sept. 18 -- The front-month crude contract hit new highs above $80/bbl Sept. 17 on speculation that the Federal Reserve will cut interest rates at least a quarter point at its Sept. 18 meeting to prevent the housing recession from damaging the rest of the US economy.
Federal Reserve Chairman Ben Bernanke has said he will do what is necessary to try to stabilize the economy. A reduction in the 5.25% funds rate would immediately reduce banks' prime lending rate of 8.25%, economists said. "All eyes today will be on the decision of the US Federal Reserve," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. Meanwhile, he said West Texas Intermediate "continues in its technical momentum despite overbought conditions."
Analysts in the Houston office of Raymond James & Associates Inc. reported crude prices were up moderately in early trading Sept. 18 on speculation that the US Department of Energy's next weekly report, due Sept. 19, will show commercial US crude inventories fell for the tenth time in 11 weeks.
Oil prices also were pulled higher by a 6% surge in the natural gas futures price Sept. 17 "amid signs that [gas] demand will rise because of warmer-than-normal weather in the US Midwest and the potential for supply disruptions during the remainder of the hurricane season," Raymond James analysts said.
"There are no immediate tropical developments, but speculation is starting to increase on an area of disturbance currently off the east coast of Florida, which could cross into the Gulf of Mexico by the end of the week and then face more favorable conditions for development [into a tropical storm or hurricane]," said Jakob.
Although Hurricane Humberto inflicted no damage on offshore oil and gas facilities before it hit the Texas coast Sept. 13, its sudden development to the surprise of the National Hurricane Center may have left an imprint on the industry. "We would expect oil facilities to be even quicker in precautionary shutdowns in any US gulf storm development," Jakob said. "Development potential in the eastern gulf will be something to watch as we move into the second part of the week."
Ethanol prices
Meanwhile, previously closely linked prices for ethanol and gasoline have diverged "over the past 3 months and particularly since the end of August," Raymond James analysts reported. "Over the past 5 years, ethanol has garnered, on average, a 40¢/gal premium relative to gasoline, which reflects the 51¢/gal federal tax credit."
As of Sept. 14, however, said Raymond James, "Ethanol was trading at a 33¢/gal discount vs. gasoline—a 73¢/gal swing to the downside as compared to the historical average. The fact that ethanol is now trading below gasoline reflects a rapid increase in ethanol supply that current blending infrastructure is having difficulty efficiently absorbing."
Raymond James analysts said, "We believe this temporary market imbalance carries the seeds of its own solution, offering a virtually riskless arbitrage opportunity for refiners to blend ethanol. The discount, along with the 51¢/gal tax credit, yields an 84¢/gal price advantage, which represents more than 40% of the current [futures market] gasoline price of $2/gal. Given the compelling blending economics, we believe that discretionary blending, i.e. blending above and beyond the Renewable Fuel Standard, is set to start showing a material increase over the next 3-6 months."
The actual timing is difficult to predict "because not all blenders will respond to the arbitrage opportunity with the same speed; smaller independents are more nimble than the integrated majors, for example," said Raymond James analysts. "But heading into early 2008, the increased demand stemming from the price disconnect should begin to restore equilibrium in the ethanol market at a price point that is, at a minimum, at parity with gasoline."
Energy prices
The October contract for benchmark US sweet, light crudes closed at a record high of $80.57/bbl, up by $1.47 Sept. 17 on the New York Mercantile Exchange. It continued to climb in postmarket electrical trading to an intraday record of $80.92/bbl. That was the fourth consecutive trading session that crude reached record highs.
The November crude contract escalated $1.29 to $79.38/gal. On the US spot market, WTI at Cushing, Okla., was up $1.46 to $80.57/bbl. Heating oil for October delivery climbed 2.09¢ to $2.23/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.78¢ to $2.04/gal.
The October natural gas contract shot up 37.4¢ to $6.65/MMbtu on NYMEX, the highest closing for that market in a month. On the US spot market, gas at Henry Hub, La., bumped up 7¢ to $6.36/MMbtu.
In London, the November IPE contract for North Sea Brent crude increased by 76¢ to $76.98/bbl. The October gas oil contract gained $2 to $696.50/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes lost 42¢ to $74.06/bbl on Sept. 17.
Because of the difference in currency exchange rates, the US has experienced relatively higher prices than some other countries. According to Bloomberg news services, the NYMEX price for benchmark US crude has risen 27% this year through Sept. 17. But oil prices are up only 16% in euros, 20% in British pounds, and 24% in yen.
Contact Sam Fletcher at [email protected].
