MARKET WATCH: Market's loss of faith drops energy prices

Energy prices continued falling, with crude touching a 2-week low of $68/bbl Sept. 1 in the New York market despite August data showing US manufacturing expanded for the first time since January 2008.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 2 -- Energy prices continued falling, with crude touching a 2-week low of $68/bbl Sept. 1 in the New York market despite August data showing US manufacturing expanded for the first time since January 2008.

With declining confidence in a quick economic recovery, traders invested in the safe haven of US currency, driving up the value of the dollar against most rival currencies.

The US Department of Labor reported US worker productivity increased at a rate of 6.6%/year in the second quarter—the largest gain in nearly 6 years—while labor costs fell at a rate of 5.9%/year—the biggest decline since second-quarter 2000—as a result of industry cutbacks in the current downturn. The resulting job shortage and stunted growth in wages also undercut the chance for a sustained economic rebound, analysts said.

Although manufacturers reported new orders at the highest level since the end of 2004, Olivier Jakob at Petromatrix, Zug, Switzerland, said “That was not enough to keep the stock market alive since at the same time rumors of rumors of rumors of a bank default were launched, and equities started a strong sell-off. The correlation trades were very active and equity, the dollar, and oil were trading yesterday [in] a straight line. Gasoline could not entirely follow and made for an improvement in the crack.”

In New Orleans, analysts at LLC said, “Natural gas continued to follow the path of least resistance—down.” For the past week, natural gas hubs where actual physical trade of gas occurs have underperformed gas futures on the New York market. “The poor pricing on the hubs is a negative for natural gas, and the growing differential between the New York Mercantile Exchange and the hubs is further evidence of the oversupplied natural gas market,” said Pritchard Capital Partners.

In other news, Deutsche Bank AG is closing and redeeming its popular $425 million PowerShares DB Crude Oil Double Long Exchange Traded Note (DXO), one of the largest leveraged commodity products in the US. “The fund cited ‘limitations imposed’ by NYMEX and will begin the process of unwinding its long oil positions on Sept. 9, a process that could put some serious short-term downward pressure on oil prices,” said analysts in the Houston office of Raymond James & Associates Inc. “Despite the hit, Deutsche Bank said it will continue to roll out commodity-linked products for retail investors within the new regulatory guidelines.”

That fund “is likely only the first head to roll; we'll have to wait and see what other funds are affected by the new Commodity Futures Trading Commission position limits,” said Raymond James.

Jakob said, “The West Texas Intermediate positions held by the DXO are in July 2010; therefore they will have to sell about 11,000 July WTI contracts (a third of the July 2010 open interest).” The bank stopped issuing new shares on DXO 2 weeks ago.

Meanwhile, officials from CFTC and the US Securities and Exchange Commission came together Sept. 2 in the first-ever joint meeting of the two federal agencies to discuss how best to “harmonize financial regulations to protect the American public.”

US inventories
On Sept. 2, the Energy Information Administration reported commercial US inventories of crude dipped by 400,000 bbl to 343.4 million bbl in the week ended Aug. 28. That was short of Wall Street expectations of a 900,000 bbl decline and a bullish estimate by the American Petroleum Institute of a 5.1 million bbl draw. Total crude stocks remain above average for this time of year. US gasoline inventories decreased 3 million bbl to 205.1 million bbl. Distillate fuel stocks increased 1.2 million bbl to 163.6 million bbl, also above average for this time of year.

Imports of crude into the US were up 351,000 b/d to 9.6 million b/d last week. The input of crude into US refineries increased 468,000 b/d to 15 million b/d, with units operating at 87.2% of capacity. Gasoline production increased to 9.2 million b/d. Distillate fuel production increased to 4.1 million b/d.

The decrease in gasoline stocks reported by the EIA was “a much larger draw than was expected due to the highest demand total (9.5 million b/d) of the summer,” said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. “While this is a positive data point, high gasoline demand is unlikely to continue for much longer, in our view, since consumption typically falls sharply in September (vs. August). Additionally, the 3% jump in refinery utilization rates should result in higher production levels in the coming weeks. We remain cautious on the near term outlook for the refining sector,” he said.

Meanwhile, Jakob warned, “Jumping to conclusions on the implied demand numbers [from the latest EIA report] will be difficult because last year Labor Day was 1 week earlier (Sept. 1 instead of Sept. 7 this year), which means that the year-ago weekly demand numbers include the pre-weekend [holiday] buying but not [the current] numbers.”

Energy prices
The October contract for benchmark US light, sweet crudes bottomed at $68/bbl in intraday trading Sept. 1 on NYMEX, before closing at $68.05/bbl, down $1.91 for the day. The November contract dropped $1.94 to $68.72/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.91 to $68.05/bbl. Heating oil for October lost 4.96¢ to $1.76/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 2.77¢ to $1.78/gal.

The October natural gas contract fell 15.6¢ to $2.82/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 8¢ to $2.37/MMbtu.

In London, the October IPE contract for North Sea Brent crude lost $1.92 to $67.73/bbl. Gas oil for September, however, gained $3.50 to $566.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $2.26 to $68.11/bbl on Sept. 1.

Contact Sam Fletcher at samf@ogjonline.com.

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