MARKET WATCH: Energy prices fall amid signs of weakening recovery

Energy prices fell Jan. 25 in a general sell-off of commodities after the UK reported a “shocking” drop of 0.5% in gross domestic product in the fourth quarter and the US government cited falling home prices and slowing manufacturing growth, indicating economic weakness just hours prior to US President Barack Obama’s upbeat State of the Union speech.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 26 -- Energy prices fell Jan. 25 in a general sell-off of commodities after the UK reported a “shocking” drop of 0.5% in gross domestic product in the fourth quarter and the US government cited falling home prices and slowing manufacturing growth, indicating economic weakness just hours prior to US President Barack Obama’s upbeat State of the Union speech.

That speech failed to lift hopes among energy analysts, however. “After 2 years of wasted opportunities to create something akin to a real energy policy, more pie-in-the-sky targets (80% clean power by 2035, anyone?) just won't cut it,” said analysts in the Houston office of Raymond James & Associates Inc.

“The bearish economic data also raised concerns over the rebound in global oil demand, leading crude to drop 1.9%” in the New York market, they said. “Meanwhile, natural gas fell 2.3% due to forecasts for warmer weather over the coming weeks. The weakness in commodity prices weighed on energy stocks.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “The front-month West Texas Intermediate-North Sea Brent spread weakened further…. Product cracks continued to trade lower; and the term structures for WTI, Brent and ICE gas oil also weakened further.” He said an oil price rally is unlikely.

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, “The price correction in crude oil continues, but yesterday it was not only an affair of oil but of commodities with selling across the boards. With most of the world getting worried (if not scared) about commodity inflation, investors need to factor in the risk of more tightening in emerging countries.” He said, “The threat for the global markets is that lower oil prices start to weigh on the equity indices (such as the Standard & Poor’s 500) through lower valuations for the oil sector.”

Federal Reserve Chairman Ben Bernanke “is probably now the only policy maker not worried about commodity inflation. [Saudi Oil Minister Ali I.] Al-Naimi was not that worried a few months back, but his latest comments about oil prices have been a bit more dovish,” Jakob said.

He said, “The king of Saudi Arabia is starting to play with fire not doing his part to combat rising inflation. Protests in Egypt yesterday resulted in a couple of deaths, and [even] if the protesters were not in the hundreds of thousands, this needs to be monitored due to the food riots of 2008 in Egypt.”

Jakob concluded, “Things were much calmer in early 2010.”

US inventories
The Energy Information Administration said Jan. 26 commercial US crude inventories increased by 4.8 million bbl to 340.6 million bbl in the week ended Jan. 21, well beyond the Wall Street consensus for a build of 1.2 million bbl. Gasoline stocks climbed by 2.4 million bbl to 230.1 bbl in the same period, a little more than the 2.3 million bbl increase analysts expected. Both finished gasoline inventories and blending components inventories increased. Distillate fuel inventories fell 100,000 bbl to 165.7 million bbl, short of an anticipated 500,000 bbl drop.

The American Petroleum Institute earlier reported a 2.1 million bbl increase in crude stocks to 342.8 million bbl, with gasoline inventories up 1.7 million bbl to 232.6 million bbl and distillate fuels down 5 million bbl to 162.4 million bbl.

EIA reported imports of crude into the US increased by 386,000 b/d to 9.4 million b/d during the week. In the 4 weeks through Jan. 21, crude imports averaged 8.9 million b/d, up 517,000 b/d from the comparable period in 2010. Gasoline imports (including both finished gasoline and gasoline-blending components) averaged 644,000 b/d, and distillate fuel imports averaged 254,000 b/d last week.

The input of crude into US refineries declined by 212,000 b/d to 14.1 million b/d in week ended Jan. 21, with units operating at 81.8% of capacity. Gasoline production decreased to 8.8 million b/d. Distillate fuel production decreased to 4.3 million b/d.

Energy prices
The March contract for benchmark US light, sweet crudes fell $1.68 to $86.19/bbl Jan. 25 on the New York Mercantile Exchange. The April contract dropped $1.65 to $87.88/bbl.

On the US spot market, WTI at Cushing, Okla., was down $1.48 to $85.19/bbl in its attempt to realign with the April futures price. Heating oil for February delivery declined 2.64¢ to $2.59/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 7.05¢ to $2.34/gal.

The February natural gas contract decreased 10.7¢ to $4.47/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 23¢ to $4.49/MMbtu.

In London, the March IPE contract for Brent crude was down $1.36 to $95.25/bbl. Gas oil for February fell $20.25 to $799/tonne, giving back more than its gains over the previous two sessions.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $1.40 to $91.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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