MARKET WATCH: Energy prices rack up second day of increases

After daily swings in recent trading sessions, energy prices racked up a second day of increases Nov. 3, spurred by a record-breaking rush for gold in the commodities market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 4 -- After daily swings in recent trading sessions, energy prices racked up a second day of increases Nov. 3, spurred by a record-breaking rush for gold in the commodities market.

“Yesterday the ‘Dowlar’ correlation [Dow Jones Industrial Average to the US dollar] trade was clearly broken with West Texas Intermediate making a strong rebound from the support line on a trigger that seemed to be more linked to a rally on gold than anything else,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Gold hit a record spot-month high of $1,084.30/oz Nov. 3 on surprising news India’s central bank, the Reserve Bank of India, bought 200 tonnes of gold, half the amount the International Monetary Fund had offered for sale. “That might push the speculative target on that commodity to a test of $1,100/oz, and that might trigger more buying on crude oil through the gold-to-oil ratio,” Jakob said. “But the underlying problem for crude remains the same: it needs demand in the physical world to be a closer match to the demand in the financial world. On the daily 2009 euro correlation, WTI closed $3.60/bbl over its implied value.”

Nicholas Brooks, head of research and investment strategy at ETF Securities Ltd. in New York, said, “India’s decision to purchase 200 metric tons ($6.7 billion) of IMF gold highlights the historic switch over the past year of central banks from being large net sellers of gold (12 consecutive years of net selling) to being net buyers of gold.” He said, “The impact on the gold market is not just purely the switch in physical demand but potentially will have an even greater and longer lasting psychological impact on the gold market as private investors are unlikely to ignore major central banks' implicit vote against the US dollar and medium-term concerns about global inflation risks.”

Brooks said, “India is likely just the tip of the iceberg with China, Russia, and other major emerging market central banks indicating their interest in building their holdings of gold as part of their diversification away from the US dollar. This appears to be a structural change that may support the gold price on a medium to longer term basis.”

In Houston, analysts at Raymond James & Associates Inc. said news that multiple UK banks received additional taxpayer bailouts acted “in the opposite direction” to limit the rise in oil prices Nov. 3.

Analysts at Pritchard Capital Partners LLC in New Orleans attributed the rise in crude prices to the “Buffet effect” after Warren Buffett, chairman of Berkshire Hathaway Inc. and one of the world's wealthiest men, agreed to buy Burlington Northern Santa Fe Corp. in a $26.3 billion deal he described as “an all-in bet on the future of America.” The dollar reversing some of its early strength also helped push crude prices higher, analysts said.

The Nov. 3 increase in natural gas prices in both the futures and spot markets “could be partially attributed to comments made by Aubrey McClendon, chairman and chief executive officer of Chesapeake Energy Corp.…that Chesapeake had elected not to hedge their future natural gas production at current prices as they believe higher prices are ahead, and the ‘right time’ to hedge has not arrived,” said Pritchard Capital Partners.

“He suggested that the price of natural gas has remained under pressure due to the large number of uncompleted wells working through the system. However, now based on Chesapeake’s uncompleted well inventory and what they are seeing industry-wide, the backlog of uncompleted wells is no longer an issue, and [company officials] expect production declines to start to be reflected in the data in the coming months. We would agree with their assertion, and we forecast that natural gas will average $6.50/Mcf in 2010,” said Pritchard Capital analysts.

In other news, an official with the International Energy Agency in Paris said the organization for the second consecutive year will make a “substantial” reduction in its long-term global oil demand forecast to be released next week. “It appears that factors weighing in the decision include ‘demand-management policies,’ which are having stronger effects in developing nations than was expected, as well as stronger drops in industrial activity due to the recent recession,” said Raymond James analysts. “This move puts the IEA in the growing camp of analysts taking a more bearish view on future demand.”

US inventories
On Nov. 4, the Energy Information Administration reported commercial US inventories of benchmark crude fell 4 million bbl to 335.9 million bbl in the week ended Oct. 30. Wall Street analysts were expecting a 1.5 million bbl increase, while the American Petroleum Institute earlier issued a “bullish” report of a 1 million bbl draw in crude. EIA said gasoline stocks declined 300,000 bbl to 208.3 million bbl, against a Wall Street consensus for a 400,000 bbl increase. Distillate fuel inventories decreased by 400,000 bbl to 167.4 million bbl, short of analysts’ expectations of a 1 million bbl decline.

Imports of crude into the US were down 764,000 b/d to 8.1 million b/d during that same period. Over the 4 weeks through Oct. 30, US crude imports averaged 8.6 million b/d, down 1.5 million b/d from the comparable 4-week period in 2008.

The input of crude into US refineries fell 233,000 b/d to 14 million b/d last week with units operating at 80.6% of capacity. Gasoline production increased to 9 million b/d. Distillate fuel production rose to 4 million b/d.

Energy prices
The December contract for benchmark US light, sweet crudes continued to climb, up $1.47 to $79.60/bbl Nov. 3 on the New York Mercantile Exchange. The January contract gained $1.44 to $80.26/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.47 to $79.60/bbl. Heating oil for December delivery rose 2.73¢ to $2.07/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 1.01¢ to $2/gal.

The December natural gas contract regained 9.8¢ to $4.92/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 7.5¢ to $4.40/MMbtu.

In London, the December IPE contract for North Sea Brent crude increased by $1.56 to $78.11/bbl. Gas oil for November dropped $2 to $625.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 56¢ to $75.53/bbl Nov. 3.

Contact Sam Fletcher at samf@ogjonline.com.

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