Oil futures post biggest monthly loss

In a surprise rally in the last few moments of trading Oct. 31 on NYMEX, the front-month December contract for benchmark US light, sweet crudes surged upward to close at $67.81/bbl, up $1.85 for the day.

Sam Fletcher
Senior Editor

In a surprise rally in the last few moments of trading Oct. 31 on the New York Mercantile Exchange, the front-month December contract for benchmark US light, sweet crudes surged upward to close at $67.81/bbl, up $1.85 for the day. Just 2 days earlier, NYMEX registered the highest 1-day percentage gain in crude prices since June.

Trading for the December contract was volatile Oct. 29 at $63.65-69.24/bbl before it closed at $67.50/bbl, up $4.77 that day, as the Federal Open Market Committee lowered its target for overnight interest rates by a half point to 1%.

"Oil's rise was mainly the result of the US dollar's biggest 1-day fall in 23 years on news that the Fed cut the fund rate," said analysts in the Houston office of Raymond James & Associates Inc. (RJA). "Oil and gas both posted solid gains of 7.6% and 4.6%, respectively, and energy stocks followed suit."

Yet neither rebound could prevent crude futures sales during October from posting the biggest monthly loss for front-month crude prices since that commodity began trading in 1983. At one point, Olivier Jakob at Petromatrix, Zug, Switzerland, said, "West Texas Intermediate came close to but failed to test the support of $60/bbl and finished the week [ended Oct. 31] higher by $3.66/bbl, but most of these gains were made in the final 10 min of the week and of the month. The front-month NYMEX crude price was down 32.6% during October, or $32.83/bbl, for the month and 54% below a record-high of $147.27bbl in July. So far this year, front-month crude prices have tumbled 29.4% on NYMEX."

Jakob said, "[North Sea] Brent was up by $3.27/bbl for the week. Heating oil for December gained $4.80/bbl, and the front-month November contract for reformulated blend stock for oxygenate blending (RBOB) increased by only $1.94/bbl. Natural gas was higher by 5%. WTI is now $28/bbl lower than a year ago, and this was the first in 5 weeks with a higher weekly close."

Heating oil holds the line
Some said the rally apparently began in petroleum products, with an end-of-month squaring of market positions. Jakob said: "Heating oil values continue to hold the oil complex above water and is the only product providing some support to refining margins, but the Commodity Futures Trading Commission data continues to show a dearth of speculative activity on heating oil with positions showing close to no change in the week. For heating oil, all the activity is happening in the commercial section or through small speculators (small speculators are holding more of the open interest in heating oil than large speculators.) In RBOB, large speculators continue the action of last week and are adding to net length and covering short positions while the crack is in negative territory."

Meanwhile, The University of Michigan/Reuters index released Oct. 31 showed a fall to 57.6 in late October, compared with a reading of 70.3 in late September. Earlier in October, the reading was down to 57.5.

The US Commerce Department said gross domestic product contracted in the third quarter to the lowest quarterly figure since third quarter 2001. For the most recent quarter, GDP fell at a seasonally adjusted 0.3%/year rate between July and September. The US Energy Information Administration reported US oil use in August was the lowest since December 2001, down 8.4% from the same period a year ago (OGJ Online, July 31, 2008).

RJA analysts said crude prices were lower in early trading Nov. 3 on concerns of continued slowing energy demand. Over the weekend, Chakib Khelil, president of the Organization of Petroleum Exporting Countries, warned that member countries must make further production cuts to stabilize oil prices between $70-80/bbl. "The downward demand pressure is partly a result of continued uncertainties around the global financial crisis, but [the] US presidential election may alleviate some of the uncertainty by providing more clarity around future government policies," said RJA analysts.

Meanwhile, supply disruptions blurred domestic gas production growth in August. The latest US Energy Information Administration's Form-914 natural gas production survey, released Oct. 31, laid out total US volumes averaging 63.3 bcfd in August—up 5.4 bcfd (9.3%) from a year ago. "While volumes fell 100,000 bcfd sequentially, we would point out that production was negatively impacted by hurricane-related (Gustav) shut-ins, which the Mineral Management Service pegs at 300,000 MMcfd, and operational issues (compression, shut-ins, etc.) in Wyoming. While this 'sloppy' data point is 2 months stale, it provides support to the bearish natural gas injection numbers seen in August, running 3.5 bcfd looser (on a weather-adjusted basis)," RJA analysts said.

(Online Nov. 4, 2008; author's e-mail: samf@ogjonline.com)

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