Sam Fletcher
OGJ Senior Writer
HOUSTON, Nov. 3 -- The price of crude continued its recent seesaw pattern, rising again Nov. 2 on a weaker dollar, better than expected Chinese manufacturing data, and improved economic indicators in the US.
Manufacturing activity in China expanded at the fastest pace in 18 months, and the Institute for Supply Management’s US factory index rose to a 3-year high in October. Manufacturing also increased in Europe, indicating all three geographic areas are “moving into expansion mode,” said analysts in the Houston office of Raymond James & Associates Inc.
In New Orleans, however, analysts at Pritchard Capital Partners LLC noted, “Crude failed to hold the highs of the day [in the New York market] as survey data indicates the Organization of Petroleum Exporting Countries’ output averaged 28.76 million b/d in October, or 80,000 b/d higher than in September.” They said, “The manufacturing data from both China and US create a positive backdrop for the oil price, but the direction of the US dollar and the commitment of the government to continued stimulus spending remain key drivers for the price of crude.”
The ISM data released Nov. 2 triggered a bounce in the Dow Jones Industrial Average, followed by an increase in crude prices. “However, as the global rebound was dangerously faltering, it is a surge in West Texas Intermediate [prices] in the last 20 minutes of the New York Mercantile Exchange’s open session that took the leadership of the global complex and contributed to the rescue of the Dow,” said Olivier Jakob at Petromatrix, Zug, Switzerland. He expects this week “will be heavy in global inputs and it is hard to see WTI trade outside of that theme.” However, he said, “We continue to not want to trade the flat price of WTI outside of what we now call the ‘Dowlar’ correlation [between the dollar and the Dow].”
Meanwhile, Jakob said, “In the real world of oil nothing has really changed apart maybe from InterContinental Exchange’s gas oil [contracts] moving into a deeper contango. Yes, the ISM manufacturing index is better than expected, gross domestic product is growing, and yes, some factories that had been idled have been turned back on; but rail freight in the US is still down 14.8% from a year ago and down 17.3% from 2007 (in the week ending Oct. 24).”
He said, “The problem remains that the distillates being produced around the world are going into the tanks of floating vessels rather than the tanks of 18-wheelers. Flat price has made a very significant rebound from the lows of February, but the structure on distillates has not changed at all. Even if we had the mother of all winters, it will be very difficult to get rid of the current glut of distillate stocks, and this is likely to make the exit of winter very problematic. Coming out of the vicious circle of refining products and hiding those in floating storage would require strong world economic growth to pull the shipping rates higher, but this is not yet occurring.”
Raymond James analysts said, “Commodities markets were also buoyed by reports that US pending home sales jumped by 6.1% and construction sector spending projects rose by 0.8% in September.” However, stocks were expected to open lower Nov. 3 “following downbeat news flow (earnings and bailouts) within the European banking sector,” they said. “In addition to this week's earnings releases, oil market participants will watch for signs out of the Federal Reserve's monetary policy meeting Nov. 4 that stimulus efforts may begin to halt, restraining a quicker economic recovery and any revival in oil demand. Separately, natural gas closed down for the fourth consecutive day Nov. 2, at a drop of 4.3%.
Gas prices fell as the market digested data from the Energy Information Administration showing US gas production increased in August. “Natural gas bottomed in September at $2.50/Mcf—September tends to be the seasonal bottom in natural gas—but for the rally to continue, the market needs to see a decline in the EIA-914 [monthly gas production] data; we need to hit the withdrawal season and start to see elevated storage levels in the US decline, more evidence from the [exploration and production companies] that they are actually lowering production either from shut-ins or lower drilling activity, and continued signs the economy (particularly industrial activity) is picking up. Until we get new information, it seems natural gas is capped at $5-5.20/Mcf,” said Pritchard Capital Partners.
In other news, Raymond James cited an “interesting article” in the Nov. 3 issue of the Wall Street Journal reporting what the analysts described as “yet another example of Beijing's willingness to do business with any country, regardless of government corruption or social and environmental damage.” The reference was to China’s proceeding with a proposed multibillion dollar oil and gas pipeline through neighboring Myanmar. “The move promises to weaken Western efforts to hobble the ruling junta there, and it continues the recent trend of China's state-owned energy companies going anywhere, and paying practically anything, to gain control over oil and gas resources,” the analysts said.
Meanwhile, analysts at FBR Capital Markets & Co. in Arlington, Va., noted Democrats on the Senate Environment and Public Works Committee indicated they would proceed with the markup of the Kerry-Boxer cap-and-trade bill despite plans by Republican committee members to boycott that procedure in protest of the pace of Congressional action and the lack of a full analysis of the legislation. “Committee rules traditionally require two Republicans in attendance for the committee to proceed (quorum),” analysts noted.
Such a partisan move “is negative for the bill’s chances of passage,” said FBR Capital analysts. “Given the intense and time-consuming focus on health care, it is unlikely that the Senate would have considered cap-and-trade before the end of the year anyway. Five committees have jurisdiction over the bill and appear unready to pass their portions in the near term. Thus, whether the committee presses forward or delays reporting the bill, Republicans will eventually have time to receive further analysis,” they said.
Energy prices
The December contract for benchmark US sweet, light crude gained $1.13 to close at $78.13/bbl Nov. 2 on NYMEX. The January contract increased $1.18 to $78.82/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.13 to $78.13/bbl. Heating oil for December delivery rose 4.08¢ to $2.05/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month was up 3.08¢ to $1.99/gal.
The December contract for natural gas dropped 22.1¢ to $4.82/MMbtu on NYMEX. On the spot market, gas at Henry Hub, La., climbed 17.5¢ to $4.33/MMbtu.
In London, the December IPE contract for North Sea Brent was up $1.35 to $76.55/bbl. Gas oil for November regained $2.50 to $627.25/tonne.
The average price for OPEC’s basket of 12 benchmark crudes declined 59¢ to $74.97/bbl Nov. 2.
Contact Sam Fletcher at [email protected].
Rystad Energy.
