Sam Fletcher
OGJ Senior Writer
HOUSTON, Oct. 25 -- Energy prices continued to waffle Oct. 22, driven higher in the New York market by the weakening US dollar and expectations of more “quantitative easing” [QE] by the US Federal Reserve Bank system in an effort to boost the economy.
Prices also were lifted by the possibility Hurricane Richard might reach the Bay of Campeche, Mexico's main oil producing region, over the weekend, as well as continued strikes preventing crude deliveries to French refineries, thus increasing demand for imported fuels, said analysts in the Houston office of Raymond James & Associates Inc.
Hurricane Richard made landfall Oct. 24 but quickly was downgraded to a tropical depression as it moved inland across Guatemala, Belize, and southern Mexico, At 10 a.m. CDT on Oct. 25, WeatherBug.com reported the storm was 135 miles south-southeast of Campeche in Mexico and 730 miles southeast of Brownsville, Tex. It was moving west-northwest at 8 mph with maximum sustained winds of 35 mph, and is expected to reemerge weaker into the Gulf of Mexico.
On Oct. 25, analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK, said, “Once again, oil prices have galloped higher but then shied at the last fence. ICE Brent futures prices briefly cleared the $85/bbl level but are currently back down at around $82.70/bbl, while West Texas Intermediate futures have trailed North Sea Brent at a respectful distance and are currently around $81.30/bbl. As the technical analysts will tell you, former resistance levels become support levels once they have been cleared, so we need now to see whether $80/bbl acts as a base or whether crude prices slip back into the $70-80/bbl band that has seen the bulk of trading activity this year.”
At Standard New York Securities Inc., part of the Standard Bank Group, analysts Walter de Wet and Leon Westgate reported, “Once again, commodity prices are mirroring movements in the dollar market. The dollar has weakened significantly against most major currencies, as finance leaders at the weekend’s Group of 20 (G20) meeting [in South Korea] stated their commitment to limiting currency intervention but failed to announce any concrete actions [or] policies regarding currency devaluation.”
De Wet and Westgate also said, “Oil prices ended last week broadly flat despite some very high daily volatility.” The biggest 1-day drop in crude prices in 8 months was recorded Oct. 19, followed by the largest 1-day gain in 5 weeks on Oct. 20. “Latest Commodity Futures Trading Commission (CFTC) report shows reduction in net oil lengths held by large noncommercials after a repaid build in length for the previous 3 weeks in a row. We expect continuous risk unwinding for the next 10 days prior to the Fed meeting, and the dollar should continue driving commodities,” they predicted.
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The G20 meeting of finance ministers did provide some surprise…. [W]e take the German minister accusing the US of manipulating the dollar through QE2 as a sign of things to come on any further erosion in the dollar. The dollar has fallen a lot since early September, and it seems clear that further weakness will lead to a greater breakdown of international cooperation. This is something that the US administration will increasingly need to weigh against the theoretical benefit of QE2 (especially since no one has really volunteered to explain the economic benefit of QE2).”
Meanwhile, he said, “The Fed conducted a permanent open market operation (POMO), buying treasuries Oct. 22 for $2.5 billion and has still $18 billion of POMO over the next five operations (the last one under the current plan being on Nov. 8). Given that since the start of September, out of the 17 POMO days only 4 were down days, it is difficult to say that QE2 will not bring some artificial support to equities. However in our opinion, playing QE2 is better done on equities than on commodities. If QE2 could also bring some support to commodities (the additional liquidity has to go somewhere) we should keep in mind that we are not anymore in a framework of free-market dynamics. This means that if commodities increase too much because of QE2, we should not exclude an interventionist action from the US government to level the price increase of commodities (either regulatory or more interventionist as in the 1996 nonemergency sales of the Strategic Petroleum Reserves for deficit reduction). If the US is intervening to artificially support the price of financial assets, we have to assume that it can also intervene to control commodity prices.”
KBC analysts said, “Recent economic data have been contradictory, and it seems likely that some of the recent crude oil buying by China has been to boost the country’s stockpiles, so it is difficult to draw too many new conclusions from the fundamentals. One factor that does not seem likely to go away any time soon, however, is the volatility of the US dollar. The Fed has made clear that another round of quantitative easing is on the cards, which should be supportive for oil prices and keep the dollar weak against other currencies. The linkage between dollar weakness and oil price strength broke down earlier this year, but has recently been reestablished.”
They noted, “Although the competitive currency devaluation of recent months has become self-defeating as a tool to help stimulate economic growth, China has shown no sign yet that it will allow the yuan currency to rise. Indeed, despite much talk, China has actively sought to counter upward pressure on the yuan by buying dollars. The US has stepped up the rhetoric against the trend for countries to devalue their currencies to buy themselves out of recession. But rather like the arms race, it is much easier to talk about coordinated action than to actually deliver it.”
Energy prices
The December contract for benchmark US light, sweet crudes recovered $1.13 to $81.69/bbl Oct. 22 on the New York Mercantile Exchange. The January contract recouped $1.12 to $82.45/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.13 to $81.19/bbl as it tried to realign with the new front-month futures price. Heating oil for November delivery increased 3.71¢ to $2.25/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 2.28¢ to $2.06/gal.
The November contract for natural gas continued falling, down 3.6¢ to $3.33/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 18.5¢ to $3.24/MMbtu.
In London, the December IPE contract for North Sea Brent gained $1.13 to $82.96/bbl. Gas oil for November was down $4.25 to $700/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 72¢ to $78.54/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
