MARKET WATCH: Sinking US dollar rallies energy prices

Sam Fletcher
Senior Writer

HOUSTON, Nov. 5 -- Front-month benchmark US crude shot up more than $6/bbl in the New York market Nov. 4, the biggest presidential election-day rally in 24 years that totally wiped out a nearly 6% loss in just the previous session.

Crude and petroleum products futures all regained previous losses in a rebound that came as equity market prices advanced and the dollar fell vs. the euro, increasing the investment appeal of energy, metals, and grain commodities. Other factors: earnings reports by Archer Daniels Midland Co. and MasterCard Inc. were better than expected, and reduction of the Organization of Petroleum Exporting Countries' production began Nov. 1.

"At one point yesterday, crude was up over 11% on estimates that Saudi Arabia has already reduced exports by 900,000 b/d from August's peak," said analysts in the Houston office of Raymond James & Associates Inc. But as an overnight rebound of the dollar (perhaps due to Illinois Sen. Barack Obama's apparent presidential win) pushed crude prices down to $68.61/bbl in premarket trading Nov. 5, Raymond James warned, "Expect energy stocks to pull back from yesterday's gains."

The primary cause of the Nov. 4 rally was that "markets were finally provided some indication that Saudi Arabia was also committing to the OPEC cuts," said Olivier Jakob at Petromatrix, Zug, Switzerland. "Compared to the market consensus in the days that followed the OPEC meeting, first indications are that OPEC will be complying better than expected with the cuts. Even Angola seems to be participating [in] the party and [Royal Dutch Shell PLC] declaring force majeure in Nigeria due to the cuts is a further sign that the compliance level will be relatively high."

Moreover, the US Minerals Management Service doesn't expect most of the 360,000 b/d of crude production still curtailed in the Gulf of Mexico since Hurricane Ike will be back on line before first quarter 2009. "Repairs to the damaged underwater pipelines are more complicated and are taking more time than expected," Jakob said.

US inventories
The Energy Information Administration said Nov. 5 commercial US crude inventories remained unchanged at 311.9 million bbl in the week ended Oct. 31, despite a Wall Street consensus for a 1 million bbl build. Gasoline stocks increased 1.1 million bbl to 196.1 million bbl in the same period vs. a consensus for a 700,000/bbl loss. Distillate fuel inventories rose 1.2 million bbl to 127.8 million bbl, a little below an expected 1.3 million bbl climb. Propane and propylene inventories also were flat at 60.4 million bbl.

Imports of crude into the US dropped 365,000 b/d in that same period to 10 million b/d. The input of crude into US refineries fell 234,000 b/d to 14.6 million b/d, with units operating at 85.3% of capacity. Gasoline production increased to 9.1 million b/d during that period, while distillate fuel production fell to 4.4 million b/d.

"Refined product inventories (gasoline plus distillate plus jet fuel) increased 3 million bbl (0.8%) last week due primarily to higher gasoline production," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. "However, with gasoline margins negative in many parts of the country, we expect refiners to reduce utilization rates in the coming weeks, which could also lower distillate supply. Distillate margins remain strong ($15-25/bbl) and are the key variable to monitor to determine refiner profitability in the fourth quarter."

Energy prices
Trading was volatile Nov. 4 on the New York Mercantile Exchange, with the December contract for benchmark US light, sweet crudes trading at $62.25-71.77/bbl during the session before closing at $70.53/bbl, up $6.62 for the day to more than offset the $3.90/bbl loss of the Nov. 3 session.

The January contract jumped $6.60 to $71.19/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $6.62 to $70.53/bbl. Heating oil for December rebounded 17.88¢ to $2.16/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) increased 17.02¢ to $1.53/gal.

The December natural gas contract continued to climb, jumping 38.1¢ to $7.22/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 37¢ to $6.82/MMbtu.

In London, the December IPE contract for North Sea Brent gained $5.96 to $66.44/bbl. The November contract for gas oil continued its rise, up $30.25 to $675.25/tonne.

The average price for OPEC's basket of 13 benchmark crudes dropped $1.26 to $57.77/bbl on Nov. 4.

Contact Sam Fletcher at samf@ogjonline.com.