Crude topped $100/bbl in New York and equity markets surged more than 4% Nov. 30 as the US Federal Reserve and five other major central banks agreed to enhance dollar-swap lines to ease the Euro-zone debt crisis in what analysts at Raymond James & Associates Inc. described as “one of the most coordinated efforts since the dark days in 2008.”
However, they reported, “Crude was held back by a bearish inventory report, finishing the day just barely in the green. Natural gas continued its trend lower, finishing the day down 2.3%. On the bright side, energy stocks outperformed the broader market,” with the Oil Service Index and the SIG Oil E&P Index each gaining 6.2%.
Economic intervention by central banks did what a potential European Union ban on Iranian crude and a mob’s attack on the UK embassy in Teheran failed to manage—push US benchmark crude to a closing above $100/bbl in the New York market, said Olivier Jakob at Petromatrix in Zug, Switzerland. “Banks intervened jointly to ensure enough liquidity in dollar swaps, and the last time they did such an act was on Sept. 18, [2008],” just 3 days after Lehman Bros. Holdings Inc. filed for Chapter 11 bankruptcy protection.
“History does not necessarily repeat itself, but it is nonetheless interesting to travel back in time to see what happened in the days that followed the central bank’s widening of swap lines in September 2008,” said Jakob. The price of North Sea Brent then rallied in 3 days from $95 to $106/bbl. The Standard & Poor’s 500 Index experienced “a 2-day low-to-high surge of 11.6% to 1,265—“compared with 7.6% increase in the S&P 500 this week to 1,246”—and the value of the euro “had a 3-day jump of 3.5%,” said Jakob.
“After those strong market movements there were a lot of euphoria in the market reports, and investors on Sept. 22, 2008, might have thought that the problems were behind them and that the central banks had solved the liquidity issue. What happened afterwards we all remember,” he warned.
China
Meanwhile, markets turned more cautious Dec. 1 as weak economic data from China suggest the world's second-largest economy may face a slowdown.
The latest Chinese government data show the official purchasing managers’ index (PMI) fell to 49 in November from 50.4 in October. “This was first below 50 reading since February 2009,” said analysts at Pritchard Capital Partners LLC. “A reading of less than 50 means the manufacturing sector has contracted.” Moreover, they said, “In a move that was months earlier than expected, China’s central bank announced a cut in the reserve ratio for banks for the first time in 3 years, reversing a gradual monetary tightening aimed at cooling growth and reining in price inflation, an effort that appeared to be bearing fruit.”
Pritchard Capital Partners said, “The shift in monetary approach clearly signals policymakers are now more concerned about supporting growth and are now expected to announce more monetary loosening measures in the coming months. Global oil prices are based on supply and demand. The linchpin of the demand argument has been import growth in China. Chinese oil demand has been slowing over the past 12 months, but it remains slowing growth, not a contraction.”
If Chinese demand growth continues to slow, they said, “The effect is to put more pressure on the supply side not to oversupply the market. This basically means how fast Libya recovers; how quickly Iraqi production can grow; and if France can lead a European Union embargo of Iranian oil that could actually result in less supply to the global market.”
China’s reduction of bank reserve ratios—“not the lending rate”—is “widely read as a significant change of policy,” said Jakob. “But we need to keep in mind that the Chinese consumer, unlike in 2008, is not anymore shielded from the real disposable income burden of high oil prices.”
Leon Westgate, an analyst at Standard New York Securities Inc., the Standard Bank Group, said, “China has been faced with the unenviable prospect of maintaining reasonable growth levels while keeping inflation in check for some time. The ongoing turmoil surrounding the Euro-zone debt crisis and the spill-over effect this has had on consumer confidence and economic activity has spread dramatically. The global cooling in economic activity has combined with government efforts to tighten liquidity and ease inflation, and appears to be reflected in recent disappointing economic data, culminating in the latest sharp and broad based downturn in the Chinese manufacturing PMI figures.”
However, he said, “The signs are that inflation is finally starting to ease, allowing the Chinese government some room for maneuver.” Expectations of lower inflation allow the government to focus on economic growth as it attempts to engineer a soft landing.
In other news, Jakob noted, “The latest European data show unemployment rising to a record high 10.3% in October (compared with 10.2% in September and 10.1% in October 2010), and a rising trend is starting to develop. Unemployment in Spain is at 22.8%. The latest oil demand numbers show gasoline sales in Spain down 6.2% in October 2011 vs. October 2010 and diesel sales down 6.1%. For the year, sales of gasoline in Spain are down 6.5% and diesel down 3.7%.”
He said, “The ICE gas oil crack and the ICE gas oil backwardation are still strong, but the premiums for diesel and jet fuel in North Europe are trending lower and providing a diverging picture to what is being priced in the futures market.”
While Great Britain and Iran “continue to exchange tit-for-tat diplomatic amiabilities” over the attack on the Tehran embassy, Jakob said, “There seems to be no consensus for the moment on an EU-wide ban on Iranian crude oil. Great Britain claims that it will likely engage unilaterally in such sanctions and could very well be joined by France and Germany (also on a unilateral basis). Those three countries import either no or very little crude oil from Iran; hence on that basis, an oil ban would have an impact politically but none on the supply and demand. We think that the southern European countries are trying to get a pledge of replacement from Saudi Arabia before agreeing to go for a ban on Iranian crude oil, [creating] a difficult balancing act for Saudi Arabia. In case of the southern European countries joining in a ban on Iran oil, it is really the decision of Saudi Arabia on replacement that will be the key for flat price.”
US inventories
Oil prices jumped in early trading Nov. 30 partly “on the news that US private sectors had added more jobs than expected in November,” said James Zhang, another analyst with the Standard Bank Group. “But much of the gains were given back later due to a sizable inventory build in the US. The lackluster performance of the oil market was in sharp contrast with the euphoria in the equity market.” Gasoline outperformed distillates, which was also driven by the US oil inventory report.
The Energy Information Administration reported commercial US crude inventories expanded 3.9 million bbl to 334.7 million bbl in the week ended Nov. 25, far above Wall Street’s consensus for an increase of 100,000 bbl. Gasoline stocks were up 200,000 bbl to 209.8 million bbl, compared with market expectations of a 1.5 million bbl gain. Distillate fuel inventories jumped 5.5 million bbl to 138.5 million bbl last week, counter to predictions of a 1.3 million bbl draw (OGJ Online, Nov. 30, 2011).
EIA subsequently reported the withdrawal of 1 bcf of natural gas from US underground storage during the week ended Nov. 25, counter to market expectations of a 10 bcf injection. Working gas in storage was reduced to 3.851 tcf. That’s 41 bcf more than the amount in storage a year ago and 261 bcf above the 5-year average.
Energy prices
The January contract for benchmark US sweet, light crudes increased 57¢ to $100.36/bbl Nov. 30 on the New York Mercantile Exchange. The February contract advanced 58¢ to $100.46/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 57¢ to $100.36/bbl.
Heating oil for December delivery inched up 0.03¢ but closed essentially unchanged at a rounded $3.02/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 2.86¢ to $2.57/gal.
The January natural gas contract dropped 8.3¢ to $3.55/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 15.8¢ to $3.54/MMbtu.
In London, the January IPE contract for North Sea Brent lost 30¢ to $110.52/bbl. Gas oil for December gained $3.25 to $965.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 64¢ to $110.38/bbl.
Contact Sam Fletcher at [email protected].
