Sam Fletcher
Senior Writer
HOUSTON, Sept. 23 -- The expiring October contract for benchmark US crude shot up more than $16 Sept. 22 in the largest 1-day price jump ever seen on the New York Mercantile Exchange, hitting a 2-month intraday high of $130/bbl and prompting an investigation by the Commodity Futures Trading Commission.
Stephen J. Obie, acting director of CFTC's enforcement division, said, "CFTC enforcement staff will scour today's trading activity to determine whether anyone engaged in illegal manipulative activity. No one should be trying to game our nation's commodity futures markets." As part of its investigation, CFTC can compel testimony, under oath, and the production of information concerning the oil markets, including recent oil trading.
Analysts in the Houston office of Raymond James & Associates Inc. said the market was driven by a "short squeeze." They said, "Traders that were short oil were desperately trying to unwind positions or find physical oil before the October crude futures contract expired." However, the large jump in crude price could not prevent corporate energy stocks from following the broader equity markets lower.
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "This was the largest squeeze ever on West Texas Intermediate, but the magnitude of what happened [Sept. 22] is so great that it does raise a few question marks as to what has really happened to the WTI delivery mechanism." As expiry of the October contract approached, he said, "Open interest was absolutely in line with previous months, so it was not the case of too large a position going into the last day of trading."
Jakob noted NYMEX's "duty" to ensure the orderly operation of markets despite disruptions of the delivery mechanism. Crude stocks are low at the Cushing, Okla., delivery point for NYMEX contracts, with pipeline deliveries of crude disrupted after Hurricane Ike hit the Gulf Coast. "We do not know the details of what exactly caused [Sept. 22's] market breakdown (and if it had anything to do with physical stocks or pipelines or with distressed positions linked to some of the financial breakdown)," Jakob said.
He earlier pointed out "abnormal trading patterns" in the closing 10 min of the Sept. 19 trading session (OGJ Online, Sept. 22, 2008). "NYMEX will need to quickly come up with an explanation as to whether it was just the result of a bad trade (and so be it, that's part of trading) or linked to infrastructure (and if that was the case why it did not call a force majeure on the delivery). Open interest in WTI Futures has been in a declining trend since last year, and without a proper explanation NYMEX risks facing another slowdown of trading interest," Jakob said.
NYMEX earlier declared force majeure on September and remaining August natural gas delivery contracts following Sabine Pipeline's decision to halt operations Sept. 12 at Henry Hub, La., due to storm disruptions (OGJ Online, Sept. 15, 2008).
The Sept. 22 price spike surpassed the previous 1-day price-gain record of $10.75/bbl on June 6. The highest percentage rise in a single day was 20.9% Jan. 3, 1994.
A steep drop in the US dollar and expectations that a government rescue plan for major financial institutions will boost both the economy and oil demand also contributed to the sharp rise in oil prices. Technical trading linked to expiration of the front-month contract also played a part. Moreover, some analysts said the rally may have been exaggerated by thin market liquidity because of the global credit crunch.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with House and Senate leaders to recommend a $700 billion capital injection to purchase bad mortgage debt from financial companies (OGJ Online, Sept. 22, 2008).
The dollar index, which measures the dollar against a trade-weighted basket of six major currencies, fell as low as 75.890 Sept. 22, down from 77.663 Sept. 19 in North American trading. The euro soared to a high of $1.4865 in the Sept. 22 session, up sharply from $1.4488 Sept. 19.
Storm recovery
The US Minerals Management Service reported 225 of the 717 manned platforms and 7 of the 121 mobile rigs operating in the US section of the Gulf of Mexico were still without crews as of midday Sept. 22. Officials said 76.6% of the oil and 65.5% of the gas usually produced from offshore federal leases have been shut in.
The Department of Energy said 9 refineries (total capacity of 2.27 million b/d) remain shut down as a result of Hurricane Ike, while another 12 refineries (total capacity of 2.95 million b/d) are running at reduced rates. Officials said 8 natural gas processing plants (total capacity of 5.08 bcfd) in Texas and Louisiana were shut down; another 14 plants (6.28 bcfd total capacity) were restarting or operating at reduced runs. Also, 7% of Texas remained without electrical power as of Sept. 22.
Shell Oil Co. has returned 1,210 employees offshore and increased production over the weekend to 32,000 b/d of oil equivalent (total gross) from a few Shell-operated facilities. The company expects to ramp up production, "depending on repairs and downstream oil and gas infrastructure readiness."
Shell Pipeline said most of the Delta pipeline system is delivering crude. In its Central Gulf pipeline corridor, the Amberjack pipeline north of the South Timbalier 301 platform is back in service and flowing oil from limited production platforms. Work continues to restore other connecting pipelines. Mars and Ursa pipelines are standing by for prestart testing when associated production facilities are ready.
Company officials are developing plans to reroute the Auger pipeline system around the damaged Eugene Island 331 platform. As a temporary measure to bring production on quickly, Shell is looking at redirecting flow from the Auger pipeline to another system in the area.
The Eugene Island pipeline remains down pending repairs at a third-party pump station and attempts to isolate subsea connections to damaged producer platforms. The Boxer pipeline is down pending start-up of the Eugene Island pipeline and the closure of a subsea valve to isolate a damaged producer platform.
In the western pipeline corridor, Cougar pipeline is down pending repairs at a producer platform. Work is progressing to restart the Central Gulf gathering system.
Onshore, the Shell-operated Capline Crude Oil Pipeline System is operating generally at scheduled rates. Deliveries continue at limited rates into Port Arthur and Houston areas on the eastern end of the Houma-to-Houston crude oil system. Finished products systems in Houston have power and are making deliveries to connecting truck terminals and pipelines. In Port Arthur, finished product systems are using portable generators to make limited deliveries from inventory.
Shell's Deer Park, Tex., refinery and chemical plant are progressing toward restart with units being brought online in a planned and sequential manner. Production and distribution of motor fuels is expected to begin Sept. 23, with normal operating rates expected by this weekend.
Motiva Enterprises LLC (a Shell-Saudi Aramco joint venture) reported power has been restored at its Port Arthur refinery. Production of gasoline and other products is expected to begin this week. Meanwhile, workers continue to blend gasoline and diesel from existing inventories for shipments into the pipeline distribution system.
Motiva's Norco, La., refinery is operating at planned rates, and its Convent, La., refinery is making gasoline and other products at 90% of capacity. The company plans to return production to normal rates over the next couple of days.
Shell's chemical plant at Norco is operating at planned rates, as is its chemical facility in Mobile. The chemical plant at Geismar, La., is still in start-up sequence and is supplying limited product to customers from existing inventory.
Energy prices
The expiring October contract of benchmark US light, sweet crudes shot up $16.37 to close at $120.92/bbl Sept. 22 on NYMEX. The new front-month November contract escalated by $6.62 to $109.37/bbl. On the US spot market, WTI at Cushing was up $16.37 to $120.92/bbl. Heating oil for October gained 14.52¢ to $3.04/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) increased 10.41¢ to $2.70/gal.
The October natural gas contract regained 12.7¢ to $7.66/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 17.5¢ to $7.68/MMbtu.
In London, the November IPE contract for North Sea Brent gained $6.43 to $106.04/bbl. The October contract for gas oil jumped by $59.25 to $965.75/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 13 benchmark crudes was up by $6.09 to $97.92/bbl Sept. 22.
Contact Sam Fletcher at [email protected].