MARKET WATCH: Crude falls to 3-week low on bearish economic indicators

Crude slipped to a 3-week low Jan. 7 in the New York market on a report the US created only 103,000 non-farm jobs in December, well below the 150,000 new jobs expected.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 10 -- Crude slipped to a 3-week low Jan. 7 in the New York market on a report the US created only 103,000 non-farm jobs in December, well below the 150,000 new jobs expected.

The unemployment rate fell from 9.8% to 9.4% last week. “A lower unemployment rate with very moderate job creation is a bit odd and has probably something to do with discouraged workers leaving the active life as the labor force participation rate drops to a new multiyear low,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

“The broader market slipped modestly [on Jan. 7], falling 0.2%,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks shrugged off the news and significantly outperformed.”

Oil was up 1% in early trading Jan. 10 on news the pipeline transporting crude from Alaska's Prudhoe Bay field was shut Jan. 8 due to a small leak in the basement of a pumping station (OGJ Online, Jan. 10, 2011). “There does not appear to be any external contamination,” said Raymond James analysts. “A similar shutdown occurred in May at a different pumping station, lasting just over 3 days. The pipeline's normal run-rate is 630,000 b/d or 12% of domestic oil production.”

They noted, “On a stand-alone basis, this is a minor mishap, but perception in this case may be clouded by recent history.” BP PLC holds the largest stake in Prudhoe Bay and the Alyeska Pipeline Service Co. that independently operates the pipeline. Other major stakeholders are ConocoPhillips and ExxonMobil Corp.

Jakob said, “US equities started the year on a strong note, gaining 1.1% for the Standard & Poor’s 500 index and 1.9% for the NASDAQ. There was some pressure developing at the end of the week due to weakness in the energy sector (given the price setback on West Texas Intermediate), and if the financial sector started the year strong [it was] the leading pressure point [Jan. 7] following the Massachusetts ruling on foreclosure (ruling that banks must own the mortgage before they foreclose).”

Compared with the start of 2007, the S&P 500 is only 10.3% lower now, but the NASDAQ is already 11.92% higher and only 3.59% lower than in October 2007. “If it was not [for] the financials being still in muddy waters, the S&P would be already back to levels comparable with the beginning of 2007,” said Jakob. “Historical volatility on the S&P 500 is very low at 6.2%.”

Federal Reserve Chairman Ben Bernanke, testifying before the Senate budget committee on Jan. 7 “confirmed that the Fed sees the rise of the S&P as the main success of [the second phase of its quantitative easing] QE2 program, that it is not worried about rising commodity prices, but that if China has a problem with commodity inflation, then all it has to do is revalue its currency,” Jakob noted. “Listening to the chairman of the US Federal Reserve, we had the impression that bidding up commodity prices has become one of the tools to force the Chinese to revalue the Yuan. That would be a dangerous process when the fear of food price riots is starting to grow,” he said.

The Fed bought some $25 billion of Treasuries last week and should purchase another $8 billion Jan. 10-11, said Jakob. “Given that the front yields are at zero, the Fed sold the idea of QE2 as an alternative way to lower the long dated yields. There, the policy has been a failure as the long dated yields have still not come off after their rally in the fourth quarter of 2010.”

Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC in Surrey, UK, said Jan. 10, “Crude futures increased sharply in December by almost $9/bbl for the front month ICE Brent contract to an end month settle of $94.75/bbl. The rise mirrored a rally in equities with the Dow Jones Industrial Average gaining 5% during the month. Both moved higher on supportive fresh macroeconomic indicators for the US, in particular, but also China. There was further support for oil from seasonally tightening US inventories, an expected absence of action by the Organization of Petroleum Exporting Countries to curb the rise in oil prices and periods of harsh winter weather in Europe and the US.”

They noted the rise in crude futures prices occurred as money managers, including the large hedge funds, increased their net long position in New York futures to all-time record highs. “Thus, the market is supported by a large overhang of speculative length, so current high prices could fall back on any reduction in risk appetite,” they said.

KBC analysts said the market appears focused on $100/bbl crude, but they question the sustainability of that high a price as oil markets are more than adequately supplied. “This level is likely to be a tipping point for oil prices, reducing the level of oil demand growth and leading to Saudi Arabia’s concern over the long term market for OPEC crude,” they said.

Energy prices
The February contract for benchmark US light, sweet crudes rocked between $87.25-89.48/bbl before closing at $88.03/bbl, down 35¢ Jan. 7 on the New York Mercantile Exchange. The March contract dropped 53¢ to $89.22/bbl.

On the US spot market, WTI at Cushing, Okla., was down 35¢ to $88.03/bbl. Heating oil for February delivery declined 2.49¢ to $2.49/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month retreated 2.99¢ to $2.41/gal.

The February natural gas contract decreased 1.2¢ to $4.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.5¢ to $4.43/MMbtu.

In London, the February IPE contract for North Sea Brent crude declined $1.19 to $93.33/bbl. Gas oil for January lost $6.25 to $769/tonne.

The average price OPEC’s basket of 12 reference crudes fell $1.23 to $90.81/bbl.

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