MARKET WATCH: Crude regains slightly on strong economic signals

On Apr. 19, crude recovered some of its loss from the previous session in the New York market as strong corporate earnings and steady improvement in US housing took some of the sting from Standard and Poor’s unprecedented negative long-term sovereign debt rating outlook for the US.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 20 -- On Apr. 19, crude recovered some of its loss from the previous session in the New York market as strong corporate earnings and steady improvement in US housing took some of the sting from Standard and Poor’s unprecedented negative long-term sovereign debt rating outlook for the US.

Although they didn’t actually cut the country's top AAA credit rating, S&P officials said the US government “might not fully offset” intense credit risks “over the next 2 years (OGJ Online, Apr. 19, 2011).”

Leon Westgate at Standard New York Securities Inc., the Standard Bank Group, said, “US Treasury Sec. [Timothy F.] Geithner’s assurances that the government was making progress towards a deficit-reducing budget might also have emboldened markets. He even ventured so far as to say in a television interview that the US would ‘absolutely’ keep its AAA credit rating.” However, he said, “Despite the general sentiment appearing to have shifted to a risk-on stance, precious metals are still managing to gain ground. Part of this can be explained by resurgent dollar weakness, both against the euro and in trade-weighted terms.”

Speculation the European Central Bank will increase interest rates helped strengthened the euro 0.8% against the dollar. “Although we expect prices to come under pressure as they have been hovering around the levels beyond which demand-growth would be negatively affected, demand has been making steady progress due to the consistent economic improvement,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Moreover, Iran’s veiled threats to Saudi Arabia yesterday would vitiate the already tense situation in the Middle East and would impede the geopolitical risk-premium from bleeding off too quickly.”

Westgate reported, “Crude oil continues to look towards the dollar for direction, with dollar weakness and stronger equity markets helping West Texas Intermediate close just under 1% higher yesterday. Better-than-expected US housing data also helped boost sentiment generally, while reports that the UK will send army officers to Libya to help advise the anti [Moammar] Gadhafi forces has done little to calm market nerves over the supply situation in North Africa. Brent crude is currently trading back above $122/bbl ahead of US trade.”

He said, “The closest analogy to the Libyan conflict so far appears to be the 1993-95 North American Treaty Organization’s no-fly zone and eventual heavy bombing campaign in Bosnia. With the African Union [peace] plan completely unacceptable to anti-Gadhafi forces and no real other avenues of dialogue appearing for the moment, the Libyan conflict is likely to be a protracted affair, which will continue to provide background support for crude oil prices.”

Meanwhile in neighboring Algeria, that country’s largest minority group—10 million Kabyles—are demanding a referendum on their autonomy and have sent a delegation to Washington, DC, seeking US support. “While the Algerian embassy boasts of a strong relationship with the US, Kabyle leaders argue that the Algerian government is helping keep Gadhafi in power,” said analysts in the Houston office of Raymond James & Associates Inc. The Kaybles on the other hand “are sympathetic to the West and actively fighting al-Qaeda.”

Raymond James analysts said, “If the situation in Algeria deteriorates, disruption to oil supply cannot be ruled out.” A member of the Organization of Petroleum Exporting Countries, Algeria produces 1.27 million b/d of crude, just less than 1.5% of global supply.

Speculating on speculators
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “President [Barack] Obama blamed again the high oil prices on the speculators. While speculators are holding record long positions in oil and are a key element in the oil rally, they react to policy inputs. If speculators started to accumulate long positions after [Ben S.] Bernanke [chairman of the Federal Reserves board of governors] announced the launch of QE2 [the second phase of the Fed’s ‘quantitative easing’ program to stimulate the economy], it is because the US Federal Reserve was afraid of deflation and embarked on a program of providing $30 billion a week to financial participants with the aim of sponsoring some inflation. It is also not the speculators but policy makers that decided to launch a new war on an oil producing country (Libya).”

Jakob said, “Another policy input that is watched by speculators is the output policy of Saudi Arabia. When that country decides a massive production cut at close-to-record oil prices, it is hard for short traders not to loose faith. We believe there is a political side to the Saudi Arabia cut in oil production, and if they are trying to barter oil against support for the Bahraini military operation then we are in a bit of trouble. Saudi Arabia seems today more focused on saving its political regime than saving the world economy.”

US inventories
The Energy Information Administration reported Apr. 20 commercial benchmark US crude inventories fell 2.3 million bbl to 357 million bbl in the week ended Apr. 15. That was counter to a Wall Street consensus for a 1.3 million bbl increase. Gasoline stocks dropped 1.6 million bbl to 208.1 million bbl, slightly less than the market consensus for a 1.8 million bbl decline. Both finished gasoline and blending components were down. Distillate fuel inventories decreased 2.5 million bbl to 148.3 million bbl in the same period while analysts were expecting a small increase of 200,000 bbl.

The American Petroleum Institute earlier reported a 667,000 bbl increase in US crude stocks to 365.5 million bbl in the week ended Apr. 15. API said gasoline inventories were down 1.8 million bbl to 212.7 million bbl, while distillate stocks fell 3.4 million bbl to 146.8 million bbl.

EIA said imports of crude into the US were down 518,000 b/d to just under 8.1 million b/d last week. In the 4 weeks through Apr. 15, US crude imports averaged 8.7 million b/d, down by 603,000 b/d from the comparable period in 2010. Gasoline imports last week averaged 853,000 b/d. Distillate fuel imports averaged 293,000 b/d.

The input of crude into US refineries increased 87,000 b/d last week to 14.1 million b/d, with units operating at 82.5% of capacity. Gasoline production increased to 9.2 million b/d, while distillate production was up to 4.2 million b/d.

Energy prices
The May contract for benchmark US sweet, light crudes regained $1.03 to $108.15/bbl Apr. 19 in the New York Mercantile Exchange. The June contract got back 59¢ to $108.28/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.03 to $108.15/bbl in step with the front futures contract.

However, heating oil for May delivery continued its decline, down 2.43¢ to $3.16/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 1.97¢ to $3.23/gal.

The May contract for natural gas recouped 12.4¢ to $4.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped by 0.3¢ but closed essentially unchanged at a rounded $4.21/MMbtu.

In London, the June IPE contract for North Sea Brent slipped lower, down 28¢ to $121.33/bbl. Gas oil for May dropped $4.50 to $1,000.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost $1.37 to $116/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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