MARKET WATCH: Oil prices fall as US dollar strengthens

Energy prices fell as the US dollar strengthened after the US Federal Reserve board made no important changes in its monetary policy June 24.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 25 -- Energy prices fell as the US dollar strengthened after the US Federal Reserve board made no important changes in its monetary policy June 24.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The Fed did not provide a major surprise in its comments apart maybe from dropping its reference to the risk of deflation.” In an upbeat statement about the economy, Federal Reserve officials said the downturn is slowing and deflation is no longer a big threat. They also said inflation is likely to remain subdued for some time due to energy and commodity prices. They announced no changes in their plans to buy Treasurys and mortgage-backed assets to lower interest rates and boost the economy.

Jakob said the dollar index rebounded strongly in global markets on rumors the Swiss National Bank was buying the dollar against the Swiss franc. The euro jumped 1.8% against the Swiss franc because of suspected intervention by the Swiss National Bank after the euro-Swiss franc exchange previously neared the 1.50 franc level.

The energy futures market shrugged off the bullish report by the Energy Information Administration that commercial US benchmark light, sweet crudes fell 3.8 million bbl to 353.9 million bbl during the week ended June 19. During the same week, US gasoline inventories jumped by 3.9 million bbl to 208.9 million bbl. Distillate fuel increased 900,000 bbl to 152.1 million bbl (OGJ Online, June 24, 2009).

In other news, the US Commerce Department reported orders for airplanes and machinery produced a better-than-expected 1.8% increase in durable-goods orders in May, the third increase in durable-goods orders in 4 months. However, orders for big-ticket items were down 5.1% in May from December.

In New Orleans, analysts at Pritchard Capital Partners LLC said crude fell in response to a stronger US dollar and a larger-than-expected increase in gasoline and distillate inventories. “Implied gasoline demand fell from 9.5 million bbl to 9.28 million bbl, raising some concerns that the economy remains weak,” they said.

Natural gas outlook
Pritchard Capital Partners said: “Natural gas traded lower [June 24] on a recommendation that the spread between natural gas and oil would widen from the current 17 times to 22 times over the next 12 months—implying that the natural gas price is headed lower. This is contrary to comments from US natural gas producers that predict higher natural gas prices are coming based on US natural gas production declines—a supply response. The EIA reports US natural gas production data 2-3 months after the fact, but initial indications in May are that production fell 600 MMcfd (May natural gas production data will not be reported by the EIA until August). Additionally, last week EnCana Corp. said it may shut-in 400 MMcfd of production, following recent comments that Chesapeake Energy Corp. will shut in 200 MMcfd of production. Effectively, natural gas is starting to see the first signs of production declines, and these declines should gather momentum in the coming months as the proposed shut-ins and the 56% reduction in the natural gas rig count produce the supply response needed to support the price of natural gas.”

Jakob said, “Weather wise, the heat wave in the US Gulf Coast continues, and Texas is expected to print an all time high power demand number [June 25]. The heat wave is traveling north into the Midwest.”

In Houston, analysts at Raymond James & Associates Inc. noted a Wall Street Journal report of a shift in market drivers for both natural gas and grains from weather to “other indicators such as Chinese demand and investment flows.” They noted this has been the “coldest June in 27 years” in the Northeast US, “which would historically cause natural gas prices to plummet, but instead prices have remained surprisingly resilient.” They said, “Some analysts speculate that gas prices are now only 60% driven by fundamentals (including weather), unlike 85% in the past. The new 'market signals' for gas traders are things such as flow of funds (exchange traded funds and hedge funds) and implied volatility.”

Both crude and natural gas were up in early trading June 25, Prtichard Capital analysts said. The EIA reported the injection of 94 bcf of natural gas into US underground storage in the week ended June 19. That brought the amount of working gas in storage above 2.65 tcf, up 631 bcf from the same period in 2008 and 482 bcf above the 5-year average.

In Nigeria, Alhaji Mujahid Asari-Dokubo, a major political figure of the Ijaw ethnic group in the Niger Delta region, was released by government authorities who are expected to propose details of an amnesty plan for militants. “But in the swamps, the situation is not yet improving,” Jakob said. Militants claimed they attacked June 25 more pipelines operated by Royal Dutch Shell PLC.

Jakob said recent attacks on oil facilities in the delta have likely reduced Nigeria’s current production of 1.3-1.4 million b/d, down from 1.9 million last July and 1.8 million in the first quarter of this year. “The attacks on the pipeline infrastructure are also having an impact on the running of the local refineries, Warri and Port Harcourt are said to be shut, and Kanuda [is reported] running on stocks, which will run out in the next 2 weeks and provide some support to the Atlantic Basin light-end products.”

He said: “Some demand support is something that light-ends in the Atlantic Basin will look forward to given the latest US Department of Energy statistics. The combination of the narrowing of the crude oil contango and the recent increase in processing economics has made for an uptick in the refinery capacity utilization and is transforming crude oil stocks into product stocks. He said 2.2 million bbl of the 3.8 million bbl crude oil stock draws recently reported by the EIA were in the discounted Petroleum Administration for Defense District 5 [on the West Coast]. On the other hand, stocks in Cushing[, Okla.] were reduced by 800,000 bbl to the lowest level this year. The ‘Other Oils’ category has not built this week, but this has been replaced by builds in the more visible products (gasoline and distillate) and makes for an overall stock build of 5.3 million bbl for the week and up 17.1 million bbl over the last 4 weeks. On the 4-week average and compared to a year ago, the crude oil supply and demand is in equilibrium with the lower level of refinery runs exactly matched by the lower level of crude oil supplies; but total demand for products is still massively lower than the drop in refinery runs.”

Energy prices
The August contract for benchmark US sweet, light crudes dropped 57¢ to $68.67/bbl June 24 on the New York Mercantile Exchange. The September contract fell 53¢ to $69.50/bbl. On the US spot market, West Texas Intermediate at Cushing was down 12¢ to $68.67/bbl. Heating oil for July delivery declined 3.09¢ to $1.74/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dropped 5.07¢ to $1.84/gal.

The July natural gas contract fell 11.8¢ to $3.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 9.5¢ to $3.82/MMbtu.

In London, the August IPE contract for North Sea Brent crude lost 47¢ to $68.33/bbl. The July gas oil contract, however, escalated $14.25 to $564.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.40 to $68.01/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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