MARKET WATCH: Hint of more economic stimulus boosts energy prices

Energy prices continued climbing July 13, with crude posting a small gain in the New York market on a weaker dollar after Federal Reserve Chairman Ben Bernanke indicated an additional monetary stimulus may be in the works.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 14 -- Energy prices continued climbing July 13, with crude posting a small gain in the New York market on a weaker dollar after Federal Reserve Chairman Ben Bernanke indicated an additional monetary stimulus may be in the works.

“Putting the remark in the context of the recent rather soft economic and employment data from the US, the market appears to think that it is now more likely that the Fed will start a third round of quantitative easing (QE3),” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“The market reacted positively to this rhetoric but pared its gains into the close with the Standard & Poor’s 500 index ending the day in the green,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas continued to trade strong for the fourth consecutive [session], finishing up 1.6% as most of the country continued to face near-record temperatures. Energy stocks outperformed the broader market.”

Bernanke’s statement “did support commodities and equities for a little while, but the QE euphoria did not manage to hold until the close,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The Fed still has its hands tied due to the price of gasoline, and it will be politically very difficult to launch a QE3 with gasoline at $4/gal. If the [International Energy Agency] could help to bring oil prices down, then that will be another story and that is also why we cannot fully exclude that Washington is pushing for another release from the strategic reserve. Despite an intraday rally, the S&P 500 did not manage to hold to the gains and closed back down to the support line of the 100- and 50-day moving averages.”

Raymond James analysts also noted Moody's Investors Service Inc. last night put the US credit rating on review for a possible downgrade. “However, prior to the opening bell, the news had a negligible effect on trading with the S&P futures and crude both in positive territory, while natural gas was in the red,” they said.

Oil prices also were boosted by a reported decline in US crude inventories. Reformulated blend stock for oxygenate blending (RBOB) in gasoline outperformed on the New York market, while heating oil and ICE gas oil lagged after the weekly inventory reports. “Term structures for North Sea Brent, West Texas Intermediate, and ICE gas oil were broadly unchanged,” Zhang said.

US inventories
The Energy Information Administration said commercial US crude inventories dropped 3.1 million bbl to 355.5 million bbl in the week ended July 8. Gasoline stocks declined 800,000 bbl to 211.7 million bbl, while distillate fuel inventories increased 3 million bbl to 145 million bbl.

EIA also reported the injection of 84 bcf of natural gas into US underground storage in the week ended July 8, surpassing the Wall Street consensus for a the consensus estimate of a 79 bcf input. That raised working gas in storage to 2.6 tcf, down 218 bcf from a year ago and 52 bcf below the 5-year average.

Meanwhile, IEA is still assessing whether to release more oil from emergency reserves in western countries.

With the next official meeting of the Organization of Petroleum Exporting Countries scheduled for Dec. 14, Zhang said, “It’s highly unlikely OPEC will come to any agreement to increase its production quotas. The IEA’s latest assessment over the oil market could set up the stage for the IEA to do a further reserve release.”

He noted, “The increased willingness to intervene in the market from the Fed and the IEA represents two significant risks [that] are likely to pull oil prices in opposite directions. The Eurozone debt crisis has yet to show any signs of improvement, while the US budget negotiation is still in stalemate with the deadline to raise the US debt ceiling fast approaching. For now, the oil price can draw support from relatively health refining margins and abundant dollar liquidity but remains vulnerable to broad-based risk aversion moves in the market if sovereign debt crises in the Eurozone and the US deteriorate further.”

Jakob said, “We do not have the same confidence that we had in early June about an IEA stock release, but given that the IEA does not usually loosely talk about stock releases, we cannot fully exclude another round. After all, by revising higher the call-on-OPEC for the third quarter, the IEA has provided the framework to justify politically another release and the Department of Energy might have been encouraged by the fact that the Strategic Petroleum Reserve tender was over-subscribed. The push for the IEA stock release clearly came from the US, and given that gasoline prices at the pump in the US are headed back towards $4/gal we could understand if there was a momentum in Washington, DC, for another stock intervention. We are not yet ready to bet our life-savings on another release of strategic stocks but given the latest IEA statements we need to still price some of that risk.”

Energy prices
The August contract for benchmark US sweet, light crudes advanced 62¢ to $98.05/bbl July 13 on the New York Mercantile Exchange. The September contract gained 64¢ to $98.49/bbl. On the US spot market, WTI at Cushing, Okla., was up 62¢ to $98.05/bbl.

Heating oil for August delivery increased 1.21¢ to $3.10/gal on NYMEX. RBOB for the same month gained 5.34¢ to $3.15/gal.

The August natural gas contract continued climbing, up 7¢ to $4.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., reclaimed 6.8¢ to $4.44/MMbtu.

In London, the August IPE contract for North Sea Brent crude escalated by $1.03 to $118.78/bbl. The new front-month August contract for gas oil jumped $16 to $983/tonne.

The average price for OPEC’s basket of 12 reference crudes shot up $2.18 to $113.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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