MARKET WATCH: Storm, market factors lift energy prices

A stronger equities market, weaker dollar, and a tropical storm shutting down production in the Gulf of Mexico combined to push energy prices higher Nov. 9 in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 10 -- A stronger equities market, weaker dollar, and a tropical storm shutting down production in the Gulf of Mexico combined to push energy prices higher Nov. 9 in the New York market.

“The Dow [Jones Industrial Average] hit a high-water mark for the year,…buoyed more than 200 points (2%) by talk of continued G20 stimulus measures and bringing oil with it,” said analysts in the Houston office of Raymond James & Associates Inc.

“Crude's 2.3% surge came along with fears of Tropical Storm Ida…as well as a weakening dollar, which slid to its lowest point in 15 months after the International Monetary Fund suggested it still has plenty of room to fall.”

The US Minerals Management Service said 126 of the 694 manned platforms in the gulf were evacuated as of midday Nov. 9 because of the storm. Personnel from 8 of the 66 mobile rigs in the gulf also were evacuated. MMS reported operators shut in 29.6% of the oil and 27.5% of daily gas produced from the gulf. Ida came ashore early Nov. 10 near Mobile Bay, Ala., with top sustained winds of 45 mph.

No damage to oil and gas facilities has yet been reported. “The storm is far from being the mother of all storms, and if one can not totally exclude disruptions (e.g. flooding), there is enough idle capacity in the US refinery system to compensate for a limited incident, and on the crude supply side the SPR would be more than happy to release stocks if that was needed (which at present seems unlikely),” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Still, he said, “The idea of Ida made it easier for West Texas Intermediate to follow the global correlations of the dollar index testing the lows of the year and the Dow printing new highs for 2009. WTI closed at par to our implied euro correlation value, but in that global theme WTI is left very dependent on the dollar index printing new and new lows. Furthermore, if the Dow was able to print new highs, the more relevant S&P 500 still has to break the previous highs.”

Saudi Arabian output
In New Orleans, analysts at Pritchard Capital Partners LLC said, “Crude [prices] rose despite indications from the Saudis that they would start to increase oil shipments to Asia in December.” In general the crude produced by the Organization of Petroleum Exporting Countries has never declined to the 24.845 million b/d oil production quota it set for itself. Its lowest production was 25.32 million b/d in March. In October OPEC production was 26.31 million b/d.

Jakob said, “Saudi Arabia took Asian refiners by surprise…by allocating some of them with higher supply in December vs. November. This acts as a reminder that we are in an environment of spare OPEC capacity and that at higher prices the risk is increasing of getting more supply. If Saudi Arabia is itself starting to increase allocations, we do not think that the smaller OPEC countries will continue to produce at quota (for those that still were), and anyway we also expect to see higher output from Nigeria in the coming months due to the renewed political stability in the Delta.”

Jakob said, “Even if the Dow at new highs is able to revive the confidence of consumers (which is less than certain as unemployment remains high) there is already more oil on the way from OPEC. As OPEC flows start to increase it will be interesting to see if they start to impact the freight rates. Higher capacity utilization of oil tankers could translate in higher rates, which in turn would narrow the current crude oil floating storage economics, force more crude from the invisible floating stocks to the inland visible stocks, which in turn translate into a wider contango that then makes the floating storage economical again.”

With US refineries still in survival mode, Jakob said, “We would expect the additional OPEC leakage at $80/bbl to translate into the formation of a wider WTI contango during the first quarter…. The wider contango will then make the speculative trade of buying WTI for the dollar more expensive to hold, and we would expect Saudi Arabia to be fully aware of this.”

Pritchard Capital Partners noted, “OPEC as a whole has never done a good job of meeting its quotas, but the Saudis have, and this is the first time the Saudis have indicated that they will be raising their production.” They said. “The Saudi production increase is important, but the direction of the dollar continues to carry more weight for the price of crude.”

The dollar weakened after the House passed the Healthcare Bill, and then weakened further when Timothy F. Geithner, US Secretary of Treasury, reiterated to the G20 the importance of maintaining economic stimulus efforts, said Pritchard Capital analysts.

Energy prices
The December contract for benchmark US light, sweet crudes regained $2 to $79.43/bbl Nov. 9 on the New York Mercantile Exchange. The January contract increased $1.98 to $80.07/bbl. On the US spot market, WTI at Cushing, Okla., was up $2 to $79.43/bbl.

Heating oil for December delivery gained 5.92¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month advanced 5.75¢ to $1.98/gal.

The December natural gas contract climbed by 7.5¢ to $4.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ but its closing price was virtually unchanged at an average $3.87/MMbtu.

In London, the December IPE contract for North Sea Brent crude gained $1.90 to $77.77/bbl. Gas oil for November jumped by $21.75 to $629/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 32¢ to $76.57/bbl on Nov. 9.

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