MARKET WATCH: Economic worries lowered energy prices

Aug. 1, 2011

Adverse economic data and an apparent stalemate on a deal to adjust US debt pushed down oil prices July 29, with crude dropping more than 2% on the New York market and natural gas down even more as Tropical Storm Don staggered ashore.

But both crude and gas prices were higher in early trading Aug. 1 as the White House and congressional leaders moved to align both parties behind a last-minute compromise deficit-reduction plan. In Houston, however, analysts at Raymond James & Associates Inc. cautioned, “The bill should easily pass the Senate but may encounter difficulty in the House as both parties are not completely satisfied (the essence of compromise).”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported oil weakened while the US failed to deliver any agreements on its debt ceiling before the market closed July 29. However, he said Aug. 1, “The market appears to believe that an agreement over the US debt ceiling will be made before the deadline tomorrow after all. Brent rallied for over $2/bbl this morning.”

Nonetheless, Zhang said, “We take the view that the debt ceiling is very much a political football between the deeply-divided two main political parties in the US. In other words, it should have very limited economic implication for the oil market in the immediate future, while the risk to the oil market is to the downside for the medium term due to fiscal spending cuts.”

He agreed, “The recent economic data confirmed a soft economy in the US, with few signs of a quick acceleration. For now, oil prices remain supported by healthy refining margins, the hurricane season, and still heated geopolitical risks in the Middle East-North Africa region, particularly in Syria. The downside risk from a broadly-based soft economy is, however, increasing. For now, we are bearish [on] West Texas Intermediate structure, refining margins, but bullish [on North Sea] Brent crude structure. We also see increasing downside risks to distillate cracks on soft economic growth.”

He reported, “Oil products held better than crude in general, which saw New York reformulated blend stock for oxygenate blending (RBOB gasoline) and heating oil cracks all improved. European product cracks and refining margins also strengthened. Term structures for WTI and Brent remained relatively stable. However, the latest news of a 5-day planned shutdown of the Forties pipeline is likely to provide further support to the Brent structures, together with strong prompt refining margins.”

Net for last week, WTI lost $4.17/bbl, while Brent fell by $1.93/bbl. “At the beginning of last week, few people believed we would end the week without a deal on US debt ceiling. As the week dragged on without any deal in sight, market sentiment shifted towards risk-off, helped by a sizable US inventory build and more negative macroeconomic picture,” Zhang observed. First-quarter gross domestic product was revised down “to mere 0.4%” while US GDP for the second quarter came [in at] 1.3%, below the expected 1.8%.” He said, “The economy was teetering close to the edge of recession again. Furthermore, there is very little the policymakers could do to stimulate the economy through either fiscal or monetary policies.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The Standard & Poor’s 500 index was in the red every day during the week and ended up giving up 3.9% vs. the previous week to be up 2.8% for the year. The month of July printed a loss in the S&P and has been doing that for 3months in a row now, something that has not happened since the 2008 market collapse.

He said, “All market sectors were losing ground, with industrials, energy, and materials being the sectors that were losing the most.”

Sieminski comments

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, reported, “US oil demand is weak and crude inventories are at the top of the 5-year range. With more Strategic Petroleum Reserve oil on the way [to delivery to buyers], we believe that inventories will continue their upward march over the course of the next month. In our view, this would indicate further downside risks to the WTI-Brent spread.”

Sieminski also noted, “China's diesel demand growth softened notably in June. On our estimates, diesel demand rose at its weakest clip in 10 months. We expect demand for diesel and broadly refined products to recover as refineries complete maintenance and prepare for the seasonal pickup in demand in the final months of the year.”

As for natural gas, he said, “If warm US weather persists, and some of the recent loosening factors wane, we expect a 3.7 tcf end-of-season storage target could be in sight. We expect this could be sufficient to reverse the current bearish environment as soon as the fourth quarter of this year.”

The Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) said on Aug. 1 workers are reboarding offshore platforms and restoring production following the passage of Tropical Storm Don. Officials said only 7 of 617 production platforms in the Gulf of Mexico remain without crews, while none of the 62 rigs in gulf waters were evacuated.

They reported 84,072 b/d, or 6% of total offshore oil production remained shut in, while 186 MMcfd or 3.5% of gulf gas production is still shut in.

Meanwhile, Raymond James analysts noted, “After falling steadily for nearly 4 decades, US land-based oil production . . . has turned the corner, and the stage is set for an extended period of sustainable US oil supply growth—a comeback few would have expected 10 or even 5years ago.” On the other hand, they said, offshore US oil production “is in for a period of volatility, with near-term downward bias, thanks to the ‘Obamatorium’ and subsequent ‘permitorium’” that have essentially halted offshore drilling for more than a year.

“Putting the two together, we are projecting modest growth in overall domestic US oil supply for the next few years, with onshore growth offsetting offshore declines,” they said. “Looking out longer term (5-10 years), the US could actually begin putting up real sustainable oil supply growth of 300,000-500,000 b/d annually as the offshore side recovers.”

Energy prices

The September and October contracts for benchmark US light, sweet crudes were down $1.74 each to respective closings of $95.70/bbl and $96.13/bbl July 29 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., dropped $1.34 to $95.70/bbl.

The expiring August heating oil contract dipped 0.9¢ to $3.10/gal on NYMEX. RBOB for the same month was down 0.47¢ to $3.11/gal.

The September natural gas contract declined 9.9¢ to $4.15/MMbtu on NYMEX. On the spot market, gas at Henry Hub, , lost 12.4¢ to $4.30/MMbtu.

In London, the September IPE contract for North Sea Brent crude decreased 62¢ to $116.74/bbl. Gas oil for August fell $8 to $971/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $1.18 to $112.18/bbl.