MARKET WATCH: Falling dollar pushes crude to 2-week high

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 9 -- The front-month benchmark crude contract jumped by 4.5% to the highest closing price in 2 weeks in the New York market as the US dollar fell to its lowest value since late last year against a basket of six major currencies on expectations that inflation will accelerate.

The general increase in energy prices “cannot be dissociated from the collapse in the dollar index, which set a new low for the year,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “In the dollar correlation model, crude oil should be $23/bbl higher, and this also makes it difficult to be short crude oil. Exogenous forces were in play…and the focus on crude oil made for a sharp move lower on product cracks,” he said.

Both gas and crude prices were up slightly in early trading Sept. 9 as investors awaited an evening meeting of ministers of the Organization of Petroleum Exporting Countries in Vienna. But that meeting “appears to be a nonevent as it is widely expected to leave output quotas unchanged,” said analysts in the Houston office of Raymond James & Associates Inc. Earlier, Kuwait’s oil minister said the group is happy with current quota levels but would like to see compliance rise to 75% from the current 68%.

Jakob advised journalists covering the OPEC meeting to grab early flights Sept. 10 to Paris where the International Energy Agency is to release its latest oil market report. “We believe that the IEA has this week more potential to move markets than OPEC,” Jakob said, adding, “If the IEA does indeed revise demand higher…then there will be a fundamental story to the current support in oil prices and not just the dollar index repetitive (but still true) explanation. We will not want to go short into tomorrow’s IEA report.”

Jakob said, “We do not know how much lower the dollar index can go as it will also depend on the interventionist decision of a few central banks, but that is why the IEA report will be important to monitor for its capacity (or not) to have an oil fundamental input replace the exogenous inputs.”

Moreover, Jakob said, “Going into next week we will have as well to refocus on geopolitical factors. In Nigeria, the Movement for Emancipation of the Niger Delta (MEND) ceasefire ends Sept. 15, and the situation on the amnesty, cash-for-guns, and related internal fights about where the money has gone is confusing enough that we will not want to fully discount a Nigerian risk. Production-wise, some onshore streams have been coming back.”

However, Royal Dutch Shell PLC reported Sept. 8 it was shutting down 115,000 b/d of output for repairs to the Sea Eagle floating production, storage, and offloading vessel in Nigeria’s giant EA oil field. Production from that field resumed in July after being suspended 3 years because of security threats.

August markets
“Oil prices traded in a fairly tight range during the month while natural gas prices continued to plummet (a trend we expect to continue through October),” said Raymond James analysts. “Oil was range-bound in August, trading anywhere from $65/bbl to $75/bbl and ending the month up only 1%. It has remained in that range so far in September and, unless the broader market was to roll over, could likely stay in this range in the coming months.”

They still see the possibility for a short-term pullback in oil prices remains, possibly driven by a pullback in the broader market. However, they said, “The global economic crisis continues to obscure oil demand, with virtually no near-term visibility. Longer-term, incremental supply projects continue to get shelved or postponed indefinitely. Such moves will result in a supply-constrained crude market. The only question is when. That answer depends entirely on when global oil demand can stabilize and begin to recover.”

Analysts at Raymond James reported, “Natural gas fundamentals remain awful. The market is only 1-2 bcfd tighter on a year-over-year basis despite a 60% drop in the rig count and over 1 bcfd of completion delays and production shut-ins. The year-over-year storage surplus is still up around 500 bcf. The market may have to squeeze 200 bcf out of the market, which could drive prices below $2/Mcf.” They added, “Gas prices fell 20% in August and are already down another 20% so far in September.”

Raymond James forecasts $6/Mcf gas prices in 2010. “Things should rebound from their current depressed levels, but our confidence in the magnitude of such a recovery is relatively low,” analysts said.

Chinese factors
Although the dollar index “decisively broke” a critical support level Sept. 8, analysts at Pritchard Capital Partners LLC in New Orleans said, “A more interesting story [that] escaped attention was that the Chinese government plans to issue 6 billion yuan ($879 million) worth of government bonds in Hong Kong on Sept. 28. By government bond issue standards, $876 million is very small, but this would be the first issue of yuan denominated debt by the Chinese government and an effort to ‘improve the yuan’s international status’ and possibly start to position the yuan as an alternative to the US dollar. Dollar weakness continues to move in tandem with commodity strength, and if the dollar continues to weaken, it is likely that crude will test $75 again.”

Meanwhile, state-owned China National Petroleum Corp. said the government approved a second-phase plan to add 69 million bbl of crude to its emergency stockpile.

Jakob said, “With the Chinese surge of crude oil imports during July, crude stocks built by 7.6 million bbl, fully reversing the 8 million bbl decline reported for June. New refinery capacity is however starting in China and overall refinery runs are expected to increase to monetize on the retail product price increase. With new refining capacity coming on stream over the next 6 months, here again higher stocks would be required to maintain a stable days-of-cover picture. Overall Chinese stockpiling is not purely an opportunistic bottom-picking trade but required by an expanding infrastructure.”

In August, Chinese car sales were reported up 90% from the same month in 2008. “It is not a record on an absolute basis but still the second ever larger sales month,” Jakob said. “One thing to keep in mind is that China is an emerging economy and the US a mature economy. That means that a large share of new car sales in the US is a replacement purchase and does not necessarily translate in increased gasoline or diesel consumption. The replacement factor in China is more from motorcycle to car; hence the strong increase in new car sales in China should translate in a greater pull on driving fuels than in the US. On a year-to-date basis, new car sales in China are higher by 37%. Since January 2008, there has been 13 million new cars sold, and higher petroleum product stocks would be needed to maintain the same days-of-cover than last year.”

Energy prices
The October contract for benchmark US light, sweet crudes escalated by $3.08 to $71.10/bbl Sept. 8 on the New York Mercantile Exchange. The November contract climbed by $3.04 to $71.59/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.08 to $71.10/bbl, still tracking the front-month futures contract. Heating oil for October delivery gained 6.2¢ to $1.78/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 5.26¢ to $1.83/gal.

The October natural gas contract climbed 7.9¢ to $2.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., shot up 57.5¢ to $2.50/MMbtu.

“The rally in NYMEX natural gas continued, but the most aggressive price action took place on the hubs,” said analysts at Pritchard Capital Partners. “Prices on the various hubs across the country were up 25-35%. The best performance came from the New York hub, which rose from [the Sept. 4] close of $2.02/Mcf to $2.75/Mcf. The average cash cost for extracting natural gas is $2.17/Mcf. At the [Sept. 4] close most hubs were trading below this level. Below $2.17/Mcf most drilling activity in the US will slow dramatically; therefore, with the hubs trading below $2.17/Mcf last week, natural gas could have made a floor last week because below $2.17/Mcf natural gas production will plummet.”

In London, the October IPE contract for North Sea Brent crude gained $2.89 to $69.42/bbl. Gas oil for September jumped $21.25 to $567.50/tonne.

The average price for OPEC’s basket of 12 reference crudes increased $1.65 to $67.83/bbl on Sept. 8.

Contact Sam Fletcher at samf@ogjonline.com.