Energy prices continued to fall Oct. 3 due to a weaker euro and a sell-off in equity markets triggered by signs of economic deterioration in Europe.
“Diesel and fuel oil cracks strengthened significantly over the last few days following the shutdown of Shell’s 500,000 b/d refinery in Singapore,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The discount of Dubai crude over Brent has also widened as Shell cuts back on high-sulfur crude purchases. The term structure for West Texas Intermediate weakened slightly, while that of Brent strengthened further.”
Recent US economic data, including the Chicago Purchasing Managers Index (PMI) manufacturing survey, personal spending, consumer confidence, and the US Institute for Supply Management (ISM) manufacturing survey “have all beaten market expectations, but remained very soft and were clearly not enough to lift market sentiment,” said Zhang. “The focus is firmly on the Euro-zone for now, rather than the US. In the Euro-zone, concerns over a Greek default and its impact on European banks have caused borrowing costs of most major banks to jump in recent weeks. It is fair to say that the market is far more concerned with another credit crunch than a mild recession in a slowdown in normal economic activities.”
In Zug, Switzerland, Olivier Jakob at Petromatrix expressed hope that “past performance is not a guarantee of future performance” because the volatility index of the Chicago Board of Exchange—the “fear index”—and the Standard & Poor’s 500 index were both “valued exactly” the same yesterday as precisely 3 years ago on Oct. 3, 2008. “Of course, not all assets are being priced as at the beginning of October 2008; back then shares of banks were much stronger and gold was much weaker. Brent crude oil at the beginning of October 2008 was at $100/bbl (and at $65/bbl at the end of that month),” Jakob reported.
The S&P 500 broke through its previous support yesterday, falling to its lowest closing so far this year, while also registering “the lowest intraday [price] of 2011 and the lowest value since early September 2010”—basically since the Jackson Hole meeting where Federal Reserve Bank Chairman Ben Bernanke announced the launch of the second phase of the Fed's quantitative easing program (QE2), Jakob said.
The S&P 500 index dropped another 1.6% in early trading Oct. 4, and the yield on the 10-year Treasury note fell to a near-record low as investors sought safer havens for their money.
The S&P 500 is under pressure “due to continued selling in the banking sector, where Credit-Default-Swaps are increasing (as in 2008),” Jakob said. “In Europe, a few people spent a sleepless night trying to arrange the fire sale of assets of the Dexia SA bank and the creation of a ‘bad bank’ for the worthless (sorry, the ‘nonstrategic’) parts” of the Franco-Belgian bank. French and Belgian officials have said they’re ready to help Dexia with a second bailout, but that has not reassured investors.
“Dexia was one of the first European banks to be bailed out in 2008 (at the beginning of October),” said Jakob. Meanwhile, the euro “took a bit of a hit yesterday when Mario Draghi [governor of the Bank of Italy and designated to succeed Jean-Claude Trichet as president of the European Central Bank in November] warned that several banks are having funding problems, either for true liquidity issues or for lack of confidence,” Jakob reported.
He said, “Bernanke will not be a happy man going into his testimony to the US House today, and while he will blame the Europeans and the Chinese for the lack of wealth creation [by] QE2…we should not discount his appetite for being seen as a savior, and we will therefore watch if he makes any comments about ‘signs of deflation.’”
Bernanke subsequently told Congress the US economy is weaker than the Fed earlier expected and that poor job growth continues to undercut consumer confidence. He warned deep spending cuts to reduce the national deficit might impede economic recovery.
In other news, Jakob said, “We continue to be very concerned about oil tanker companies…we have to fear that it is going to be game-over soon for some tanker owners.”
WTI-Brent discount
Zhang noted, “Since the beginning of 2009, WTI has been trading at a discount to Brent most of the time. The discount was deepened further this year and reached $26/bbl at one point. However, oil product prices in PADD 2 [the Midwestern Petroleum Administration for Defense District, which includes the key exchange point of Cushing, Okla.] are traded at similar levels to other regions, as PADD 2 is a net importer for oil products.”
Consequently, many PADD 2 refineries with access to WTI or to crude whose prices remained anchored to WTI have benefited from “extraordinarily strong” margins. “Not surprisingly, PADD2 refinery run-rates have been very high,” Zhang said.
“PADD 2 is structurally short of oil products and fills the majority of the shortfall from PADD 3 [on the US Gulf Coast],” he said. High refinery runs in the Midwest effectively have reduced the need for product imports. As a result, production flows from the Gulf Coast to the Midwest have dropped since 2007. “During the first quarter of this year, the flow set new record lows,” Zhang reported.
The Gulf Coast has the biggest concentration of refineries in the US, accounting for about half of the country’s total refining capacity. But the main grades of crude such as Light Louisiana Sweet and Mars supplying those refineries “are effectively priced off Brent and are therefore significantly more expensive than WTI,” Zhang noted.
With decreased demand from PADD 2, he said, “Refining margins in PADD 3 have come under more pressure and have to fill the gap with export markets outside the US. As the discount of WTI over Brent continues, we expect a continuous shift in US domestic product flows, and a knock-on effect in more US production exports.”
Energy prices
The November contract for benchmark US sweet, light crudes fell $1.59 to $77.61/bbl Oct. 3 on the New York Mercantile Exchange. The December contract dropped $1.50 to $77.83/bbl. On the US spot market, WTI at Cushing was down $1.59 to $77.61/bbl.
Heating oil for November delivery declined 2.64¢ to $2.75/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.71¢ to $2.51/gal.
The November contract for natural gas continued its retreat, down 4.9¢ to $3.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.3¢ to $3.60/MMbtu.
In London, the November IPE contract for North Sea Brent lost $1.05 to $101.71/bbl. Gas oil for October fell $9 to $874.50/tonne.
Contact Sam Fletcher at [email protected].
