Sam Fletcher
OGJ Senior Writer
HOUSTON, Aug. 23 -- Energy prices continued falling Aug. 20 with the front-month crude contract down for the third consecutive session on the New York market amid increased signs the economic recovery is bogging down.
Analysts in the Houston office of Raymond James & Associates Inc. said crude remained near 6-week lows in early trading Aug. 23 while natural gas continued to decline. “The broader market ended last week on a down note with the Electronic Payment Exchange and Oil Service Index underperforming the Standard & Poor’s 500 by 1.32% and 1.48%, respectively. That said, global markets are rallying today, and futures are signaling that stocks may be positioned to recoup some of last week's losses,” they reported.
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “After the heavy losses of the previous week, the S&P 500 continued to move down but at a slower rate [last week]. The small losses of the week are the result of a strong rebound seen Aug. 16, but as we start this week we remain mostly influenced by the heavy losses of Aug. 19 and the follow-through selling on Aug. 20.”
However, he said, “The volatility index (VIX) remains on the low side and was still close to 25% at the end of the week. The VIX is not pricing any systematic risk, but there is growing concern about the significant outflows from US mutual funds where investors are currently moving out of stocks and into bonds.”
Jakob maintains West Texas Intermediate continues “oversold to the average of the correlations to the S&P, VIX, and the euro” by as much as $3/bbl. “On the 50-day horizon, the WTI correlation to the S&P remains very high but is weakening both on the VIX and the euro correlation,” he said.
The crude contract was down 2.9% for the week as the dollar climbed 0.9% against the euro “on risk capital’s flight to safety,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The market read European Central Bank council member Axel Weber’s statement about not reviewing the stimulus to the European banks before first quarter 2011 as a signal that the economic conditions in the second half of the year will remain challenging in Europe. Furthermore, the projections of a second-half slowdown are heightening concerns about the potential double-dip recession in the US and have pushed the prices lower. With uncertainties about how the economy is going to look for the remainder of the year, crude will be looking towards the equities market for direction,” he said. Natural gas dropped 1.3% on Aug. 20 on forecasts of milder weather across much of the east coast this week.
No ‘decisive’ breaks
Analysts at the Centre for Global Energy Studies (CGES), London, noted, “For the past 10 months crude oil prices have remained remarkably stable, with benchmark grades trading in a range between $70 and $80/bbl and showing no sign of breaking decisively in either direction.”
Moreover, oil supplies are abundant, with production outside the Organization of Petroleum Exporting Countries up by 1 million b/d, “as Mexican output has stabilized and new fields have come on stream in Russia, Brazil, the US, and Africa, boosted by rising output of gas liquids. OPEC has also seen a surge in its production of gas liquids, which fall outside the quota system, as new LNG trains are commissioned,” CGES reported.
“OPEC has plenty of spare capacity, but the departure of the last brigade of US combat troops from Iraq has raised concerns about the country’s ongoing stability as it continues to struggle to form a government more than 5 months after the parliamentary elections,” said CGES. “Meanwhile, global oil demand is rising as the world economy recovers from recession, but the pace of the increase is likely to slow in the second half of 2010 and into 2011 from the levels seen in the first half of this year.” That’s partly because demand for the first half of 2010 was rebounding from comparable lower levels in the first half of 2009.
“But it is also a reflection of the belief that the recovery is beginning to run out of steam, particularly in the developed countries of the Organization for Economic Cooperation and Development, where consumer confidence has not returned, unemployment remains stubbornly high, and governments are beginning to embark on deep spending cuts in the face of huge fiscal deficits,” CGES reported. “In developing Asian countries, too, demand growth appears to be easing as the demand for their exports has not taken off as hoped.”
Oil prices of $70-80/bbl “are comfortable for the oil producing countries and also for the oil industry, which is able to pursue the complex new projects that are needed to offset decline in older fields,” CGES analysts observed. It’s even acceptable to governments of major oil-consuming countries “as high oil prices help them in their pursuit of environmental objectives,” they said.
The only group to whom high oil prices are unacceptable is energy consumers, “many of whom are already concerned about their future earnings prospects, are being hit by rising fuel and food prices, and are likely to be squeezed further by the ending of government stimulus packages, leaving them reluctant to increase their discretionary spending,” CGES pointed out. “At present, OPEC is in a position to keep oil prices where it would like to see them, but this comes at a cost…that the global economy will recover more slowly and the oil market will not grow as fast as it would have done with more moderate prices.”
Energy prices
The September contract for benchmark US light, sweet crudes dropped 97¢ to $73.46/bbl Aug. 20 on the New York Mercantile Exchange. The October contract fell 95¢ to $73.82/bbl. On the US spot market, WTI at Cushing, Okla., was down 97¢ to $73.46/bbl. Heating oil for September delivery declined 2.97¢ to $1.97/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.36¢ to $1.93/gal.
The September contract for natural gas lost 5.4¢ to $4.12/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 9¢ to $4.18/MMbtu.
In London, the October IPE contract for North Sea Brent lost $1.04 to $74.26/bbl, still priced at a premium to WTI. Gas oil for September dropped $8.25 to $630.25/tonne.
The average price for OPEC’s basket of 12 benchmark crudes was down $1.25 to $71.78/bbl. So far this year, OPEC’s basket price has averaged $75.49/bbl.
Contact Sam Fletcher at [email protected].
