MARKET WATCH: Energy prices climb before holiday but decline afterward

Nov. 29, 2010
Energy prices shot up Nov. 24 ahead of the long Thanksgiving holiday weekend in the US but then generally dropped slightly in a short trading session Nov. 26 with trading volume a quarter lower than average on the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 29 -- Energy prices shot up Nov. 24 ahead of the long Thanksgiving holiday weekend in the US but then generally dropped slightly in a short trading session Nov. 26 with trading volume a quarter lower than average on the New York market.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “US stocks were slightly down during the short week, and that follows a previous week that was flat.” But since the New York market was closed Nov. 25 for the Thanksgiving holiday and Nov. 26 was “a semi-holiday” with an early closing, Jakob said, “It is difficult to make a strong read of the [Nov. 26 partial] reversal of the [larger Nov. 24] gains.”

He noted, however, trading volume was unusually low. “Low volume is the norm on Black Friday [after Thanksgiving when US stores open early for Christmas shoppers], but this time volume has hit the low of the lows and was at the lowest level of 2010 and was 36% lower than Black Friday 2009,” Jakob said.

“Although last Friday was not an official holiday, the markets closed early to let traders enjoy at least half of the day with their families. However, despite the festive atmosphere, the broader markets closed down 1%,” said analysts in the Houston office of Raymond James & Associates Inc. “Oil prices also slipped as concerns over the European sovereign debt crisis grew and tensions flared on the Korean peninsula.” The drop in oil prices dragged down the oil service index 1.5% and the Electronic Payment Exchange by 0.8%, they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Although oil weakened marginally on Friday, front-month West Texas Intermediate had support from a power failure at the Enbridge Inc. pipeline [that] transports Canadian crude to the US.” The front-month WTI futures contract had a net increase of $2.02/bbl in the holiday-shortened week in the New York market. “The entire gain took place on [Nov. 24] on the back of positive US macroeconomic data. Product cracks and refinery margin stayed flat for the week; so did time spreads. The physical differential for West African crude strengthened as a result of Shell’s force-majeure on Bonny Light crude,” said Zhang.

While not directly linked to energy, many traders are concerned about the massive leak of US diplomatic secrets via the WikiLeaks web site over the weekend as it may affect Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries. Leaders of Israel, Bahrain, Saudi Arabia, and the UAE were revealed as pleading with both the George W. Bush and Barack Obama administrations to deal more forcefully with Iran, especially over its nuclear power program.

“The release of the US diplomatic cable lays bare the tension among the gulf countries regarding Iranian nuclear program. Although this is unlikely to cause any immediate supply disruption, the media reports once again push to the forefront the constant geopolitical risk supply of oil is exposed to,” Zhang said.

He noted temperatures in northwest Europe are forecast to be 3-7° C. lower than seasonal average for this week, which should increase heating demand. However, he said, “The latest gas oil inventories in the Amsterdam, Rotterdam, and Antwerp shipping region have climbed 2 weeks in a row and now stand at above $720/tonne. This is 5% higher year-over-year and around 50% above the 5-year average. We expect the market will be well supplied.”

Looking ahead, Zhang said, “Our focus is on upside risk of US economy recovery. For now, our view stays that the oil market will be anchored by high inventory and abundant supply.”

In other news, Jakob noted, “Since the start of [the US Federal Reserve Bank's second round of quantitative easing (QE2) in early November], the Fed has bought $48 billion of Treasuries from the primary dealers while the Standard & Poor’s 500 index lost 2%. The [Fed Chairman Ben] Bernanke wealth creation is for now not evident. This week, however, the Fed will be particularly active as it has scheduled to buy $33 billion of Treasuries; included a double-POMO (Permanent Open Market Operation) Nov. 29 for a total of about $10 billion, then $6-8 billion tomorrow, $7-9 billion [on Dec. 1], $7-9 billion [Dec. 2], and $6-8 billion on [Dec. 3].”

He reported, “Since the start of QE2, both the Chicago Board of Exchange Volatility Index and historical volatility have increased, the [Investment Company Institute] data showed continuous outflows from equity mutual funds, and volume on the New York Stock Exchange has not increased. For now the Fed has not been successful recreating risk-taking.”

Energy prices
The January contract for benchmark US light, sweet crudes shot up $2.61 to $83.86/bbl Nov. 24, the day before Thanksgiving on the New York Mercantile Exchange. But in a short trading session Nov. 26, it dipped to $83.76/bbl. The February contract climbed $2.60 to $84.43/bbl Nov. 24 but slipped to $84.35/ bbl. On the US spot market, WTI at Cushing, Okla., jumped $2.51 to $83.84/bbl Nov. 24 but a closing price was not available for Nov. 26.

Heating oil for December delivery increased 7.59¢ to $2.33/gal Nov. 24 but decreased 0.93¢ Nov. 26 on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 7.94¢ to $2.21/gal Nov. 24 but slipped 0.33¢ the day after Thanksgiving.

The expiring December natural gas contract was up a minimal 0.3¢ to $4.27/MMbtu on Nov. 24, while the new January front-month contract gained 1.1¢ to $4.40/MMbtu Nov. 26 on NYMEX. On the US spot market, gas at Henry Hub, La., lost 10¢ to $3.86 MMbtu Nov. 24 and was unchanged Nov. 26.

In London, the January IPE contract for North Sea Brent crude lost 52¢ to $85.58/bbl on Nov. 26. Gas oil for December dropped $6.75 to $722/tonne on that same day.

The average price for OPEC’s basket of 12 reference crudes declined 21¢ to $82.34/bbl on Nov. 26.

Contact Sam Fletcher at [email protected].