Sam Fletcher
OGJ Senior Writer
HOUSTON, June 6 -- The front-month crude price retreated June 3 in the New York market, pulled down by poor economic data but kept from falling further because of the weakening dollar.
“The week could not have been worse in terms of US macroeconomic data: a very sharp fall in [the US Institute for Supply Management] ISM manufacturing [index], double-dip in the Case-Schiller home price index, a drop in the conference board confidence index, a poor ADP [national] employment index report on jobs in the private sector, confirmed [on June 3] by very weak nonfarm payrolls,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The nonfarm payrolls for March and April were revised slightly lower, and…the May numbers were way below any forecast.”
Jakob said, “There are still 5 million jobs to be created before the losses seen since July 2008 are offset, and even after that the unemployment rate would not be back to 2008 levels due to the growing population factor. Unemployment in May increased slightly vs. April and is [up] 9.1%, but given the low participation rate in the labor force the real unemployment is larger than the official number.”
He noted US stock indices were lower last week in the fifth consecutive week of losses. “However, if in the previous weeks the losses were minimal, this week they were solid. The Standard & Poor’s 500 index lost 2.32% in the week and is now [up] only 3.38% for the year,” he said.
As the Federal Reserve Bank's second quantitative easing (QE2) program “comes to an end” in June, Jakob said, “It is going to be a comedy show seeing how [Fed Chairman] Ben Bernanke spins out the negative numbers that are emerging at the end of the very controversial program that he promoted. QE2 has done nothing to the real economy and to employment. The cash assets held by US commercial banks have, however, continued to rise: the additional liquidity provided by the Fed has gone to the vaults but not to the economy. Cash held by US banks is at a record high, $658 billion higher than at the start of the year, and $485 billion higher than a year ago or $1.3 trillion higher than in 2008.”
Jakob said, “We remain of the opinion that a significant mistake is being made by central banks in regard to the impact that they have on commodity prices. The decision makers in central banks are not up to date with the developments in the financial markets, and they fail to grasp the concept of commodities as an asset class. They still view commodities as something having a life of their own, whereas the commodity prices are today for a very big part being priced off the action of central banks. In the end, if QE2 was a failure it was because of the rising commodity prices, and commodities started to rally on the news of the QE2 start-up.”
He added, “The only thing that QE2 has successfully managed to do is to debase the dollar, but at a cost to the US economy due to the rising commodity prices. Selling the dollar has continued last week; it is one of the few themes still having a trend, and we are now entering the experiment zone for some of the nondollar export economies. The Swiss Franc is 28% more expensive than a year ago; the Euro is 18% higher and has no history of sustainability at current levels. The exports from Europe will see shrinking margins.”
Jakob said, “With its gross domestic product already down to only 0.3% in the first quarter, we do think that Switzerland is at risk of recession for the second half of the year. Denmark surprised all the analysts last week by officially moving into recession in the first quarter. The Swedish manufacturing index was in May at the lowest level in 18 months…. It is not only the US that is experiencing a ‘soft patch.’”
The front West Texas Intermediate 3-2-1 refinery margin (July) was unchanged last week but the 3-2-1 against Brent lost about 80¢/bbl. Jakob said, “The reformulated blend stock (RBOB) crack to Brent was weaker during the week, but partially offset by an increase in the heating oil crack.”
He said, “Going into the summer, gasoline is priced below heating oil, and the gasoline crack will not be helped by naphtha, which is seeing its crack fall to the lowest level of the year and some of the weakest levels since 2008. A large part of the US drop of demand vs. last year comes from the ‘other oils,’ which will include industrial feedstock, and the loss of demand from that part of the barrel, combined with the weakness of naphtha is a confirmation input for the theme of a slowdown in industrial output.”
OPEC outlook
Members of the Organization of Petroleum Exporting Countries “suddenly are talking [increased production] numbers,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “Briefings by ministers’ aides ahead of the June 8 meeting in Vienna are now suggesting that the oil producers may consider raising production targets by 0.5-1.5 million b/d, and press reports suggest that a 1 million b/d hike is in the cards.”
OPEC hasn’t changed its official production target since 2008, “when nose-diving oil prices following the banking crisis saw the group agreeing a 4.2 million b/d production cut,” reported KBC analysts. “The anonymous nature of the comments on the potential hike in the output target make it premature to call this a proposal, but if it does go on the agenda in Vienna, it risks opening a potential can of worms for the oil producers on how the extra barrels will be allocated.”
Official production quotas until recently have been “flouted by all but OPEC’s Arab Gulf members, and as oil prices have spiraled higher, the word ‘compliance’ has barely been heard in the corridors of OPEC,” KBC analysts said. “Saudi Arabia has the only meaningful spare capacity to take advantage of any actual production increase, although…it is by no means clear that this will be the upshot of any increase in the production target.”
Iraq currently is outside the quota system, and not all OPEC members agree with their current production quotas. “So allocating the extra barrels to individual countries will be anything but simple, although a simple prorate reversal of previous cuts might provide a basis for discussion,” KBC analysts concluded.
Energy prices
The July contract for benchmark US light, sweet crudes declined 18¢ to $100.22/bbl June 3 on the New York Mercantile Exchange. The August contract decreased 20¢ to $100.80/bbl. On the US spot market, WTI at Cushing, Okla., was down 18¢ to $100.22/bbl.
Heating oil for July delivery increased 1.28¢ to $3.06/gal on NYMEX. RBOB for the same month was up 2.54¢ to $2.99/gal.
The July natural gas contract dropped 8.7¢ to $4.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1¢ to $4.73/MMbtu
In London, the July IPE contract for North Sea Brent crude gained 30¢ to $115.84/bbl. Gas oil for June rose $6.75 to $950.75/tonne.
The average price for OPEC’s basket of 12 reference crudes increased 53¢ to $110.44/bbl. So far this year, OPEC’s basket price has averaged $106.36/bbl, up from an average $77.45/bbl for all of 2010.
Contact Sam Fletcher at [email protected].
