MARKET WATCH: Gas surplus, strong dollar cut energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 10 -- Energy prices fell Aug. 7 with natural gas undercut by large supplies and oil prices pushed lower as the US dollar strengthened on reports of fewer-than-expected job losses in the US market.

The US Department of Labor tracked 247,000 layoffs in July—the least for any month since August 2008. The monthly unemployment rate eased for the first time since April 2008 to 9.4% in July from 9.5% in June.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “West Texas Intermediate spent the week in heavy congestion, closing up $1.12/bbl vs. the previous week while [North Sea] Brent was higher by $1.89/bbl. Reformulated blend stock for oxygenate blending (RBOB) was slightly lower, losing 59¢/bbl, while heating oil was the star of the week with gains of $3.22/bbl. Natural gas was marginally higher, gaining 0.43%.”

In New Orleans, analysts for Pritchard Capital Partners LLC said, “Crude bulls have pointed to increased Chinese oil demand to support the current crude rally, but on [Aug. 7] Zhang Jianguo, the president of China’s second-largest bank, China Construction Bank, said it would cut lending by about 70% in the second half of 2009 to avoid a surge in bad debt. If the Chinese were to restrict their lending, it could impact the Chinese growth rate, but like most things in the Chinese economy, it is difficult to predict how much the increased lending has contributed to their growth.”

Pritchard Capital Partners also noted, “The amount of crude being stored at sea has also risen by 10 million bbl in the past 2 weeks, and the total amount of crude at sea is estimated at 70 million bbl. In the current upswing crude has not made a new high, and these two factors could contribute to profit taking in oil early next week.”

However, at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “The latest data for floating storage makes sobering reading for market fundamentalists. While crude oil stocks at sea are gradually declining, there is now an armada of product stocks sailing the seven seas.” Back in March, only 4 million bbl of products “lurked offshore” but at the end of July the total had soared to 63 million bbl. “In March, the destination of choice for storage was offshore West Africa but now products are bursting out all over. We don’t have precise numbers for the composition of the floating products stocks but it doesn’t take a genius to guess that middle distillates are forming a growing proportion,” they said.

KBC analysts said, “A feature of the current crude price structure is the steep discount of prompt WTI to prompt Brent.” The price of Brent was $2.66/bbl higher at the close of trading Aug. 7, down from a gap of $3.50/bbl earlier in the week.

“One of the factors behind the gap is uncertainty about the outcome of the Commodity Futures Trading Commission hearings and new, more restrictive, regulations that might follow. It is widely believed that if the US regulations are tightened up there will not necessarily be copycat changes elsewhere: so exposure to Brent is perceived to be less risky,” KBC analysts reported. “Indeed, other centers (Dubai, Singapore, and many others) must be licking their lips with anticipation of trades fleeing New York and maybe London. In fact, the main reasons suppressing WTI prices are fundamental. Loading schedules for North Sea and Nigerian cargoes show lower availability, and the market has tightened.”

Pritchard Capital analysts said, “The better US economic data helped the US dollar, sent oil lower, but provided no support for natural gas, which is surprising since unlike oil the natural gas price is primarily driven by the US economy and not the global one. The worst of the economic downturn is behind us, but there is an abundance of natural gas as evidenced by most [exploration and production companies] delivering higher production than anticipated.” In recent telephone briefings with analysts, they said, “Price-driven shut-ins were mentioned as likely by XTO Energy Inc., Chesapeake Energy Corp., and EOG Resources Inc.” However, they reported, “Each company said it would exceed previous production guidance. Signs that the consumer is strengthening will be the precursor to higher industrial production numbers, which will drive higher industrial demand for natural gas, the weakest element of demand year-to-date.”

Energy prices
The September contract for benchmark US light, sweet crudes dropped $1.01 to close at $70.93/bbl Aug. 7 on the New York Mercantile Exchange. The October contract fell $1.09 to $72.78/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.01 to $70.93/bbl. Heating oil declined by 2.45¢ to $1.91/gal on NYMEX. RBOB for the same month lost 5.26¢ to $2.01/gal.

The September natural gas contract dropped 6.9¢ to $3.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18¢ to $3.56/MMbtu.

In London, the September IPE contract for North Sea Brent crude declined $1.24 to $73.59/bbl. Gas oil for August dropped $3.50 to $607.50/tonne.

The average price for OPEC’s basket of 12 reference crudes lost 96¢ to $71.96/bbl Aug. 7. So far this year, OPEC’s basket price has averaged $53.60/bbl.

Contact Sam Fletcher at [email protected].