MARKET WATCH: Crude price rises from slump

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 28 -- Energy prices rose Oct. 27 with the front-month crude contract pulling out of a three-session slump to approach again the $80/bbl price level in volatile trading in the New York market.

“In an increasingly rare occurrence, crude bucked the dollar yesterday and rose 1% the same day the greenback had its biggest gain vs. the euro since August,” said analysts in the Houston office of Raymond James & Associates Inc.

In New Orleans, analysts at Pritchard Capital Partners LLC said the price of crude was pulled higher by an increase in gasoline prices on the New York market after Valero Energy Corp. said it would limit or cut its gasoline production to protect margins that have doubled in the past month.

The increase in energy prices was aided by S&P/Case-Shiller US National Home Price Index—a composite of single-family home price indices for the nine US census divisions—showing a 1% increase in home prices during August, a sign of economic recovery.

Moreover, Raymond James analysts said, “If you're following Middle Eastern politics—and you should be—you'll know that oil rose moderately after a rocket was fired from Lebanon into Israel, prompting retaliatory fire from the Israeli army.”

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland said the crude futures market appears “temporarily out of service.” He complained, “Between the dollar and equities, it is difficult to trade anything but a computerized correlation. The risk and reward of trading the direction of oil independently of the exogenous markets when the correlations are so high remain very poor, and trading oil without a tick-by-tick look at equities and the dollar should continue to be avoided. The problem remains that, when asset classes that are supposed to act somewhat independently trade with such a strong correlation, we come to a situation where no single market knows exactly what it is pricing.”

Jakob said, “The Volatility Index might be relatively low, but we are raising our systemic risk alarm to the highest level because such high inter-asset correlation means that no market is trading on its own fundamentals.” He warned, “There will be at one stage a breaking point because as oil goes higher on exogenous inputs, consumer confidence will start to falter, and yesterday’s numbers were a first warning sign.”

Energy prices continued to climb in after-hours electronic trading as the American Petroleum Institute issued a bullish report of a draw of 3.5 million bbl of crude from US commercial inventories in the week ended Oct. 23. However, oil prices slipped lower in premarket trading Oct. 28 “as European and Asian shares declined, sending international equity markets lower for the seventh straight day. Natural gas was also trading down before the bell,” Raymond James analysts said.

US inventories
On Oct. 28, the Energy Information Administration reported crude inventories increased only 800,000 bbl to 339.9 million bbl, well below both the earlier API estimate and Wall Street’s consensus for a build of 1.9 million bbl. Gasoline stocks climbed 1.7 million bbl to 208.6 million bbl in the week ended Oct. 23, counter to analysts’ expectations of a 1 million bbl draw. Distillate fuel inventories decreased by 2.1 million bbl to 167.8 million bbl, compared with Wall Street’s outlook for a 1 million bbl draw.

The import of crude into the US increased 191,000 b/d to 8.9 million b/d in that same period. Input of crude into US refineries was up 133,000 b/d to 14.2 million b/d with units operating at 81.8% of capacity. Gasoline production increased to 8.8 million b/d, while distillate fuel production decreased to 3.8 million b/d.

Energy prices
The December contract for benchmark US light, sweet crudes gained 87¢ to $79.55/bbl Oct. 27 on the New York Mercantile Exchange. The December contract rose 78¢ to $80.15/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 87¢ to $79.55/bbl. Heating oil for November delivery increased 2.16¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month climbed by 3.67¢ to $2.07/gal.

The November natural gas contract regained 4.4¢ to $4.56/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 3.5¢ to $4.51/MMbtu.

In London, the December IPE contract for North Sea Brent crude was up 66¢ to $77.92/bbl. Gas oil for November increased $4.25 to $640.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 27¢ to $76.43/bbl on Oct. 27.

Contact Sam Fletcher at samf@ogjonline.com.