MARKET WATCH: Crude closes at 3-month high above $51/bbl

Front-month oil futures jumped to a 3-month high closing above $51/bbl after the US Fed said it will buy another $750 billion in mortgage securities and $300 billion in longer-term bonds over the next 6 months.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 20 -- Front-month crude futures prices jumped to a 3-month high closing above $51/bbl Mar. 19 after the Federal Reserve said it will buy another $750 billion in mortgage securities and $300 billion in longer-term government bonds over the next 6 months to help shore up the financial system.

"The recent bullish move in commodities continues to be pushed by the weakened dollar thanks to the US Federal Reserve's new plan to print money to fight the recession," said analysts in the Houston office of Raymond James & Associates Inc. "Oil rose 7.2% to close above $50/bbl, a new 3-month high. Interesting to note, after trading at a discount to Brent crude the last few months due to bulging inventories, West Texas Intermediate is now trading at a $1/bbl premium to [North Sea] Brent. Natural gas prices also ripped yesterday (up 13.3%) on a slightly bullish Energy Information Administration report of a withdrawal of 30 bcf" from US underground storage.

Energy stocks outperformed the falling broader equity market as commodities continued to rally, Raymond James analysts said.

The US dollar weakened materially for the second consecutive session. The dollar index, which values the dollar against a basket of major currencies, was trading at 86.471 shortly before the Fed announced its decision in late afternoon on Mar. 18. It traded as low as 82.631 before finishing at 83.113 on Mar. 19.

It was "not an oil rally but a commodity index rally combined with the usual short covering that it can trigger, as standing in front of the [dollar] index train is always a dangerous proposition," said Olivier Jakob at Petromatrix, Zug, Switzerland.

"Technically, WTI has managed to break the resistance of $50/bbl and will need to preserve that level on the support (basis May) for a continuation of the trend next week," he said.

"The oil fundamentals have not changed during the week. The Organization of Petroleum Exporting Countries' cuts have not yet done the job of reducing the level of oil inventories and the current financial rally is occurring too soon as it will lead to lower OPEC compliance before stocks had a chance to be drawn down," Jakob said. "The core of the fundamental problem remains the level of distillate stocks that require refinery run cuts. Stocks of distillates are burdensome and at levels already necessary for the next winter, and with the wide gas oil contango we understand that supertankers are starting to be fixed with floating storage options for gas oil."

Reaching out to Iran
Shortly before midnight Mar. 19, President Barrack Obama released a special video message for all those celebrating Nowruz, the Iranian New Year's celebration. The holiday marking the arrival of spring is celebrated in several countries, including Afghanistan, Azerbaijan, India, Iraq, Pakistan, and Tajikistan. In the message, Obama said, "At this holiday we are reminded of the common humanity that binds us together."

He also addressed Iran's leaders directly, saying the US wants Iran "to take its rightful place in the community of nations." Obama said, "You have that right—but it comes with real responsibilities, and that place cannot be reached through terror or arms, but rather through peaceful actions that demonstrate the true greatness of the Iranian people and civilization. And the measure of that greatness is not the capacity to destroy, it is your demonstrated ability to build and create."

Jakob described the message as "a significant and serious olive branch to Iran." He said, "The presidential elections in Iran will be held in mid-June, and we think that the words and tone of President Obama's message to Iran is too great of a change for the spiritual leaders of that country to ignore. We have transitioned from a US president talking of an [Axis] of Evil to a US president trying his best to speak a few words of Farsi [at the end of the video] and we would lower some of the war premium included in the far out-of-the-money call options. This geopolitical development should not be ignored."

The initial reaction from Iran was cool. Aliakbar Javanfekr, a close aide to Iranian President Mahmoud Ahmadinejad, said, "The Obama administration so far has just talked. …We are waiting for practical steps by the US."

Energy prices
The April contract for benchmark US light, sweet crudes traded as high as $52.25/bbl Mar. 19 before closing at $51.61/bbl, up $3.47 for the day on the New York Mercantile Exchange. That contract expires at the close of trading Mar. 20. On the US spot market, WTI at Cushing, Okla., continued following the front-month futures contract, up the same amount to the same finish. The May contract on NYMEX gained $3.14 to $52.04/bbl. Heating oil for April delivery climbed 9.23¢ to $1.36/gal. The April contract for reformulated blend stock for oxygenate blending (RBOB) was up 7.16¢ to $1.44/gal.

Natural gas for the same month jumped 49¢ to $4.17/MMbtu on NYMEX after EIA reported the larger-than-expected withdrawal of 30 bcf of natural gas from US underground storage in the week ended Mar. 13. That left 1.65 tcf of working gas in storage, up 326 bcf from the same period a year ago and 228 bcf above the 5-year average (OGJ Online, Mar. 19, 2009). On the US spot market, gas at Henry Hub, La., advanced 6¢ to $3.82/MMbtu.

In London, the May IPE contract for North Sea Brent crude increased $3.01 to $50.67/bbl. The April gas oil contract gained $25.75 to $427.75/tonne.

The average price for OPEC's basket of 12 reference crudes was up $1.75 to $45.64/bbl on Mar. 19.

Contact Sam Fletcher at samf@ogjonline.com.

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