MARKET WATCH: Energy prices bounce back from 1-day dip

Energy commodity prices bounced back Aug. 15 from a one-session dip at the end of last week, with the front-month crude futures contract temporarily topping $88/bbl in intraday trading in the New York market.

The equity market solidified gains “as the three major indices erased the remaining losses” from the earlier downgrade of US credit by Standard & Poor’s Financial Services LLC, said analysts in the Houston office of Raymond James & Associates Inc. “Driven primarily by a flurry of merger and acquisition activity, the S&P 500 index posted its third straight positive day, finishing up 2.2%. Energy equities led the pack as crude oil rose 2.9% on a weaker dollar and positive economic signals. Natural gas, on the other hand, finished the day marginally lower due to milder-than-expected temperatures,” they said.

“Oil and equities continued to move in tandem with the 10-day correlation, at 95%, as both markets are shaped by the same macroeconomic and sovereign debt concerns,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Raymond James analysts said, “Buoyed by the improved crude price environment, the EPX [SIG Oil Exploration & Production Index] posted a solid 3.8% gain and the Oil Services Index jumped 3.6%, impelled by the news of Transocean Ltd.'s planned purchase of Norwegian drilling firm Aker Drilling ASA.” During early trading Aug. 16, however, news of weaker-than-expected growth in the Eurozone had oil and gas in the red.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Our opinion remains that to have a sustainable rally in crude oil some good economic signs are needed; oil prices cannot forever be supported just because the dollar is weak due to a worsening economic picture in the US.”

Jakob observed, “We are past the point where some weakness in the dollar can create additional world oil demand. First of all, the Chinese yuan is tied to the dollar, hence a rise of oil prices on a weaker dollar impacts negatively the two main engines of oil demand (US and China). Secondly, the world economy is global enough that economic weakness in the US will not be isolated there.”

In terms of oil fundamentals, Jakob said, “We expect to see a crude oil build on the US Gulf Coast in the weekly statistics [to be released Aug. 17], given that we estimate that there should have been a transfer of at least 6.5 million bbl from the Strategic Petroleum Reserve to commercial stocks. The Brent September futures contract expires today, and the expiring spread has not been as tight as in recent expiries. The contango in West Texas Intermediate is, however, narrow, and the spread difference between Brent and WTI is in our opinion not large enough to have traders buy Brent rather than WTI on the basis of roll optimization.”

He said, “Brent (or US Light Louisiana Sweet) at $120/bbl had a negative impact on demand and consumer sentiment in the first half of the year despite having then some global euphoria about strong economic growth and employment to supposedly come in the second half of the year. We are in the second half of the year with much lower consumer and investor confidence, and we think that it is fair to assume that a return to $120/bbl Brent (or LLS) would have in the second half of the year a much greater negative impact on consumption than in the first half of the year. Not to mention the interventionist pressure that will develop on policy makers. In the current economic climate we see, therefore, little sustainable upside in buying Brent above $110/bbl.”

The volume of WTI trades was moderate yesterday, with no inflows into the WTI exchange traded funds, and trading on options totally stalled. Jakob said, “The bottom-picking activity seems to be slowing down, and continuation in the price rebound needs to come from more convinced buyers now that the ‘oil seems cheap’ buyers have done their shopping.” He said, “The momentum is therefore starting to be positive in WTI, but it now needs to break the resistance of $88.30/bbl to avoid the creation of a dead-cat bounce.”

Meanwhile, Zhang reported, “A recession in the US and Eurozone in the next 6 months seems increasingly likely. German gross domestic product data undershot consensus (0.1% actual vs. 0.5%). French data last week posted no growth for the second quarter. US second quarter GDP expanded by 1.3%, after a mere 0.4% increase in the first quarter (revised down from 1.9%). However, we do not expect the global economy to contract as much as it did in the 2008 recession.”

Given the recent weak global economic data, he said, the probability of negative growth during the next 6 months in the US and the Euro-zone has increased and so has the downside risk to oil prices.

Energy prices

The September contract for benchmark US sweet, light crudes jumped by $2.50 to $87.88/bbl Aug. 15 on the New York Mercantile Exchange. The October contract escalated $2.45 to $88.14/bbl. On the US spot market, WTI at Cushing, Okla. remained in step with the front-month futures price, up $2.50 to $87.88/bbl.

Heating oil for September delivery increased 4.04¢ to $2.94/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 5.23¢ to $2.87/gal.

The September contract for natural gas lost 3.6¢ to $4.02/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 9.5¢ to $4.04/MMbtu.

In London, the September IPE contract for North Sea Brent was up $1.88 to $109.91/bbl. Gas oil for September gained $5.75 to $922.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 97¢ to $104.78/bbl on Aug. 15. So far this year, OPEC’s basket price has averaged $107.30/bbl.

Contact Sam Fletcher at [email protected].