Crude and product prices rebounded Aug. 10 on a bullish report of falling US inventories. The surge generally wiped out losses from the previous session but did not recoup the bigger sell-off at the start of the week.
“This remains a market that can move up or down $5/bbl,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The oil volatility index is way above the levels seen during the Libyan crisis.”
Moreover, Jakob said, “The volatility in the stock market has climbed to the highest levels since October 2008, and when shares of too-big-to-fail banks are up or down 20% in a day, we do want to remain cautious on risk exposure as the [reaction] of global markets to any news or comments is difficult to control.” He said, “The recent surge of volatility will not help consumer or business confidence. We do not see how companies will start any massive hiring program after the events of the last few weeks. As far as the confidence of investors, the ICI [Investment Company Institute] data up to Aug. 3 are showing acceleration in the outflows from equity mutual funds.”
Analysts in the Houston office of Raymond James & Associates Inc. said, “Due to the bullish inventory report, crude disconnected from equities, ending [Aug. 10] up 4.3%. Natural gas traded relatively flat for the day. Energy stocks slightly outperformed the broader market as the Oil Service Index and SIG Oil Exploration & Production Index (EPX) declined 3.5% and 3%, respectively.” However, oil and gas prices were lower in early trading Aug. 11.
“Yesterday's 4-5% drop in the major US indices marked the third consecutive day of 400-plus point swings on the Dow Jones Industrial Average—something that hasn't happened since November 2008,” Raymond James analysts reported.
Trading volume “remains on the high side in West Texas Intermediate; trading in options is very active and clearly with an open interest concentration on calls rather than puts; inflows into the crude oil Exchange Traded Index Fund (ETF) are increasing,” Jakob reported. “Bottom-picking action is ongoing, but WTI failed yesterday to produce a higher daily high [as it has done in recent sessions]. Overnight trading is continuing the rebounding pattern and has broken the Fibonacci level at $83.60/bbl. That will be the main level to preserve on a closing basis to confirm a rebound. Above that the next resistance line will be at $85/bbl and then the Fibonacci line at $89.60/bbl.”
The Fibonacci analysis holds that prices rise or fall by specific percentages after reaching a high or low. It originated with Leonardo Fibonacci, a 13th century mathematician whose work on the relationship of mathematics and nature has been applied in physics, astronomy, engineering, and marketing.
“Although the sovereign crisis and associated risk-off trade have hit energy markets, we do not see sharply weaker energy fundamentals—whether in commodities, credit, or equities,” said Barclays Capital Research analysts in London. “The industry is well capitalized, and the biggest energy market—oil—is facing much greater challenges of supply than demand, based on our analysis. Demand remains robust, most notably outside [member nations of] the Organization for Economic Cooperation and Development, and supply is highly constrained, with spare capacity just 2% globally.”
Saudi’s growing influence
Recent softening in OECD demand may prevent the oil price from overshooting in 2012, rather than sending it lower. However, Barclays Capital analysts said, “The big downside protection for oil—relative to most other assets—is that the Organization of Petroleum Exporting Countries can cut supply to restore the balance. And with so little spare capacity, Saudi Arabia is the world’s sole swing producer, giving it a level of control not seen since the heights of OPEC in the 1970s.”
They said, “The kingdom’s new wave of spending, designed to counter domestic discontent and shore up regional allies, has seen its budget breakeven rise from below $80/bbl to nearer $100/bbl. We believe this is the new oil price floor. Over the next 12 months, as the current risk-off trade subsides, we expect oil prices to be on a rising trend from $100-130/bbl, even with potentially slower economic recovery in OECD countries.
On Aug. 10, the Swiss National Bank announced another liquidity injection to counter the strength of the Swiss franc. Combined with the measures adopted Aug. 3, the Swiss National Bank is injecting an amount equivalent to 17% of the country’s gross domestic product. “To put things in perspective, it would be as if the US Federal Reserve would trigger a [third round of quantitative easing, QE3] of $2.5 trillion,” Jakob said. “If it does not succeed, the SNB stated that it would take other measures, and it will have to because Switzerland cannot function with a euro parity. The yen is, however, back to pre-intervention level as the market is testing the resolve of the Bank of Japan. Following what the SNB is doing, we do not see how the Bank of Japan will not intervene again.”
Jakob said, “While the weakness in the banking sector is the focus of the market, there is one sector that is doing much worse and that is the ocean transportation sector. For owners of very large crude carriers the crisis was not in the fourth quarter of 2008 or the first quarter of 2009—it is today as there is simply not enough oil demand for the supply of ships.”
In other news, Raymond James analysts noted Apple Computer Inc. overtook ExxonMobil Corp. as the most valuable publicly traded US firm on Aug. 10—a title the integrated oil company had held since 2005. Apple finished the day with a market capitalization (the total dollar value of all a company's outstanding market shares) of the $337 billion, 2% ahead of ExxonMobil's $331 billion. General Electric Co. (GE) and Microsoft Corp., both former holders of this title, were far behind at $160 billion and $203 billion, respectively.
Still, the analysts said, “We wouldn't read much into 1 day's trading—and, to be sure, Exxon is still No. 1 in earnings.” They suggested, “Exxon has only itself to blame for losing the market cap crown. Considering that its acquisition of XTO Energy Inc. [in 2010 through an all-stock deal valued then at $41 billion] wiped out about $15 billion of market cap on the day of the announcement in 2009, this alone more than covers the current gap vs. Apple.”
Fitch revision
Fitch Ratings in Chicago revised its price deck upwards in expectation of continued modest economic growth in 2011 and to reflect the actual realized price levels through the first 7 months of this year. Fitch raised its base case price deck to $90/bbl for WTI from $75/bbl previously, with natural gas unchanged at $4/Mcf.
Fitch’s stress case price deck for 2011 is $70/bbl for crude, up from $55/bbl, with gas unchanged at $3.50/Mcf. The stress case price deck “continues to reflect the potential for a ‘double-dip’ global recession with an accompanying slowdown in global demand and pullback in hydrocarbon pricing,” Fitch officials reported.
“The slight increase in long-term pricing ($5/bbl) reflects a modest increase in full-cycle costs for select North American producers in 2010, as well as Fitch's expectation for increased inflation in the sector on a forward-looking basis,” they said.
Company officials said, “Oil is expected to continue trading at a premium to US natural gas over Fitch’s time horizon as non-US growth, led by the BRIC countries (Brazil, Russia, China, and India), supports tighter supply and demand fundamentals.”
The Fitch price deck is not a price forecast. Instead, it reflects “a more conservative view” of future price levels for modeling and rating purposes and for evaluating future commodity price expectations from a bondholder’s perspective. As a result, officials said, “Fitch’s price deck will often remain below current spot and futures markets prices and at times will diverge significantly in out-years.”
The price deck also is intended to reflect supply-demand fundamentals (particularly the long-term price deck) with the recognition that near-term events (e.g. weather patterns, natural disasters, wars and geopolitical risk premia, inflation expectations) can result in “significant deviations” from fundamental levels. Over time, Fitch anticipates non-fundamental drivers of commodity prices should fade, leaving prices to revert to Fitch’s long-term price level, which is driven by the marginal cost of supply for each commodity and will fluctuate as demand rises and falls and supply costs change due to developments in technology, regulation, taxes, new discoveries, etc.
Fitch is introducing new hydrocarbon price decks for Europe, the Middle East, and Africa. On the natural gas side, this includes National Balancing Point prices and on the oil side Brent crude. These new price decks will allow for greater differentiation of regional hydrocarbon pricing, company officials said.
US inventories
The Energy Information Administration reported Aug. 11 the injection of 25 bcf of natural gas into US underground storage, well below the Wall Street consensus for a 35 bcf injection. The latest addition brought working gas in storage to 2.78 tcf, down 197 bcf from the year-ago level and 80 bcf below the 5-year average.
EIA earlier said commercial US crude inventories fell 5.2 million bbl—the largest draw so far this year—to 349.8 million bbl in the week ended Aug. 5, surprising Wall Street analysts who expected a 1.4 million bbl build. Nevertheless, crude inventories remained slightly above average for this time of year. Gasoline stocks dropped 1.6 million bbl to 213.6 million bbl in that same period, again thwarting analysts’ consensus for an increase of 900,000 bbl. Distillate fuel stocks decreased 700,000 bbl to 151.5 million bbl vs. market projections of a 1.1 million bbl increase (OGJ Online, Aug. 10, 2011).
It was “the first significant stock draw in 16 weeks,” said Jakob, including 3.3 million bbl from Gulf Coast inventories. “At face value, given that the US Gulf Coast is receiving Strategic Petroleum Reserve barrels, the crude oil stock draw looks positive,” he said. However, he reported, “In our opinion that stock draw is not ‘real’ but due to the accounting timeline of the SPR deliveries.”
The EIA report was for the week ended Aug. 5, while 4.9 million bbl of SPR crude were scheduled for delivery Aug. 1-7. Jakob calculates only 900,000 bbl were delivered within the timeline of the EIA report. That would have left 4 million bbl to be delivered Aug. 6-7. Therefore, Jakob said, “The reported stock draw in the US Gulf Coast of 3.3 million bbl needs to be taken as making room for the 4 million bbl delivered on the last 2 days of last week.”
Still, Raymond James analysts said, “Demand posted bullish numbers for the second week in a row as total petroleum demand rose 3.3% sequentially, but remains down 0.1% year-over-year on a 4-week moving average basis. Turning to refining, utilization rose to 90.0% last week from 89.3%, and is just 0.3% below its high for the year.
Energy prices
The September contract for benchmark US sweet, light crudes regained $3.59 to $82.89/bbl Aug. 10 on the New York Mercantile Exchange. The October contract took back $3.58 to $83.25/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.59 to $82.89/bbl.
September contracts for heating oil and reformulated blend stock for oxygenate blending had the biggest proportional gains, rebounding 10.05¢ to $2.87/gal and 11.49¢ to $2.78/gal, respectively.
The September contract for natural gas inched up 0.9¢ to $4/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued climbing, up 2.1¢ to $4.09 MMbtu.
In London, the September IPE contract for North Sea Brent increased $4.11 to $106.68/bbl. Gas oil for August advanced $1.25 to $887.50/tonne.
The average price for OPEC’s basket of 12 benchmark crudes slipped 33¢ to $101.20/bbl.
Contact Sam Fletcher at [email protected].
