MARKET WATCH: International economic fears boost energy prices

Energy prices rebounded Sept. 17, with the front-month crude contract regaining most of the $10/bbl it had lost over the two previous trading sessions on the New York market.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 18 -- Energy prices rebounded Sept. 17, with the front-month crude contract regaining most of the $10/bbl it had lost over the two previous trading sessions on the New York market.

"[Sept. 16] was a commodity rout as the American International Group Inc. (AIG) was liquidating positions, and [Sept. 17] was a cross-commodity gainer as cash was looking for a parking lot," said Olivier Jakob at Petromatrix, Zug, Switzerland. The US Federal Reserve earlier announced an $85 billion emergency loan package to rescue AIG, one of the world's largest insurers, from financial failure due to the collapse of the subprime mortgage market and the resulting credit crunch AIG said it plans to repay at least part of that loan through sales of assets (OGJ Online, Sept. 17, 2008).

In New Orleans, analysts at Pritchard Capital Partners LLC said, "While the stock market tumbled lower on more financial crisis news, energy futures and other commodities headed in the opposite direction…as investors sought refuge in tangible goods." News of the government intervention reinforced concerns that the US financial system is deeply troubled. Goldman Sachs Group Inc. and Morgan Stanley, the two remaining independent financial institution giants, also took market hits Sept. 17.

Pritchard Capital Partners charged, "Capitol Hill has a role in this whole swaps mess. Under the Sarbanes-Oxley Act of 2002, if the swaps dealers won't buy the swaps back, then you have to value them at zero…they are forcing people who hold real assets to value them at zero, and that is forcing the company out of business. That is dumb legislation, or the lack of regulation of the swaps market."

JPMorgan Chase & Co. is reported to be the largest seller and buyer of credit default swaps, a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. "CDS's became staggeringly popular as credit risks exploded during the last 7 years in the US. Banks argued that with CDS they could spread risk around the globe," said F. William Engdahl, a consulting economist who writes about energy, political, and economic issues.

A similar government bailout of Bear Stearns Cos. Inc. in March "was motivated, in part, by a desire to keep the unknown risks of that bank's credit default swaps from setting off a global chain reaction that might have brought the financial system down. The [Federal Reserve's] fear was that because they didn't adequately monitor counterparty risk in credit-default swaps, they had no idea what might happen," Engdahl said in a June copyrighted article.

Some CDS market experts anticipated an economic crisis would start "with hedge funds that will be unable to pay banks for contracts tied to at least $150 billion in defaults," he said. "Banks will try to preempt this default disaster by demanding hedge funds put up more collateral for potential losses. That will not work as many of the funds won't have the cash to meet the banks' demands for more collateral."

Jakob said, "Market concern is now turning to Morgan Stanley…a major liquidity provider to the energy over the counter markets, and its collapse would have much wider repercussions to oil trading than did Bear Stern or Lehman [Bros. Inc.] credit risk departments will be busy today, and we would expect the fear on Morgan to translate in lower commercial trading which then exposes the futures market even more to asset flows playing musical chairs."

Meanwhile, Pritchard Capital Partners reported Sept. 18, "Oil prices swung higher overnight as central banks united in a plan to help improve liquidity in global financial markets. The Federal Reserve announced a $180 billion expansion of swap lines so that banks can borrow more at lower rates. Energy futures prices engaged in a rally ahead of the market open, as the dollar fell on the move by central banks, thus funneling more money into the crude oil market. The ongoing supply crunch after Hurricanes Gustav and Ike also boosted crude and products prices in preopening action."

In the Houston office of Raymond James & Associates Inc., analysts said, "Crude's [earlier price] decline has experienced a bit of a reversal following a bullish Department of Energy report, and oil is up more than 10% from its [Sept. 17] bottom. Remember, an economic slowdown will likely be needed domestically to help balance the global supply and demand picture, which remains fairly tight."

DOE's Energy Information Administration said US crude inventories fell 6.3 million bbl to 291.7 million bbl in the week ended Sept. 12, far surpassing Wall Street's expectation of a 3.4 million bbl drop. US gasoline stocks dropped 3.3 million bbl to 184.6 million bbl, closer to analysts' consensus that also was for a 3.4 million bbl decline. Distillate fuel inventories lost 900,000 bbl to 129.6 million bbl in the same period, 1 million bbl short of the Wall Street consensus (OGJ Online, Sept. 16, 2008).

However, Jakob said, "We find it difficult to make hard conclusions on the DOE statistics as too large a share of the industry was idle [during the surveyed week] because of the storms. On one side, products were not moving out of refinery tanks but were being drawn at the retail stations; on the other side crude oil was not being discharged from tankers to the refinery storage. Hence we are still of the opinion that the real US stocks are tighter than reported on products and heavier than reported on crude oil."

Storm aftermath
The US Minerals Management Service said 425 of the 717 manned production platforms and 50 of the 121 mobile offshore rigs in the Gulf of Mexico were still without crews as of midday Sept. 17. MMS reported 95.9% of the oil and 82.3% of the natural gas normally produced from federal leases in the gulf remained shut in.

DOE reported 12 refineries with total capacity of 3 million b/d remained shut down while 13 refineries (total capacity of 3.1 million b/d) were operating at reduced rates. In the Houston area, 3 petroleum products pipelines with a total capacity of 367,000 b/d were shut down. Another 8 pipelines with total capacity of 5 million b/d were operating at reduced rates. Officials said 18 natural gas processing plants with 9.2 bcfd total capacity remained shut down in Texas and Louisiana., with another 11 plants (5.9 Bcf/d total capacity) restarting or operating at reduced runs. As of Sept. 16, 35.1% of Texas remained without electrical power. Ports of Freeport, Galveston, Port Arthur, and the Houston Ship Channel are open to vessels with drafts of less than 16 ft.

Hurricanes Gustav and Ike triggered a spike in supply vessel day rates and increased demand for inspection and repair services in the US sector of the Gulf of Mexico. "Jack up day rates are poised to move higher following the loss of four rigs (6% of the pre-storm marketed fleet)," said analysts at Lehman Bros. Inc. Third quarter results for most offshore-related companies will likely suffer downtime losses because of the storms, but fourth quarter results should benefit from the incremental demand for services, they said.

Swift Energy Co. resumed production at its various fields affected by the recent hurricanes, including the Newport area of Lake Washington. Drilling will resume in Lake Washington and the surrounding area when contracted rigs can return to the field.

Anadarko Petroleum Corp. is repairing minor surface damage on its Constitution, Marco Polo, Gunnison, Nansen, and Boomvang platforms in the gulf. Anadarko said its Neptune platform is ready to resume production when pipelines allow.

Mariner Energy reported no material damage from Hurricane Ike and anticipates restoring a majority of its production over the next several days, with the remaining portion expected in the following weeks.

Valero Energy Corp. blamed Ike for delaying the restart of an earlier fire-damaged heavy oil cracking unit at its 340,000 b/d refinery in Corpus Christi, Tex. The unit was shut down by a small fire Sept. 5 and was expected to be down for repairs for 7-10 days, cutting gasoline production by 80,000 b/d and distillate production by 7,500 b/d.

ConocoPhillips's 247,000 b/d Alliance refinery east of New Orleans and its 239,000 b/d Lake Charles, La., refinery were increasing production volumes while restarting after being shut by Gustav. The Alliance refinery also sustained flooding from Ike.

TEPPCO Partners reported its two main pipelines from the Texas Gulf Coast were operating at 70% combined capacity Sept. 17. Power was restored to the Baytown hub, but the Beaumont hub is without power.

Magellan Midstream Partners LP resumed operations on its southern pipeline system from East Houston to Frost, Tex. Power was restored to the partnership's East Houston terminal, and truck loading operations resumed. Its Galena Park terminal along the Houston Ship Channel has partial power.

Energy prices
The October contract for benchmark US sweet, light crudes shot up $6.01 to $97.16/bbl Sept. 17 on the New York Mercantile Exchange. The November contract climbed $5.94 to $96.96/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $6.01 to $97.16/bbl. Heating oil for October gained 10.5¢ to $2.82/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) advanced by 6.22¢ to $2.46/gal.

Natural gas for the same month jumped 63.1¢ to $7.91/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ to $7.78/MMbtu. Pritchard Capital said, "The significant boost in natural gas futures was seen as an important move by some traders because it penetrated and closed above resistance, which had been placed as being anywhere between $7.60-7.85[/MMbtu]."

In London, the November IPE contract for North Sea Brent crude regained $5.62 to $94.84/bbl. October gas oil lost $1.25 to $880.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased by $1.19 to $87.88/bbl Sept. 17.

Contact Sam Fletcher at samf@ogjonline.com.

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