MARKET WATCH: Stronger dollar drives oil price below $79/bbl

Energy prices continued to fall Oct. 26 with crude dropping 2.3% in the New York market as the dollar strengthened from a 14-month low against the euro.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 27 -- Energy prices continued to fall Oct. 26 with crude dropping 2.3% in the New York market as the dollar strengthened from a 14-month low against the euro.

“The US Dollar Index rose 0.7%. The best reason given for the rally in the dollar was an oversold bounce,” said analysts at Pritchard Capital Partners LLC in New Orleans. However, they said, “Suspiciously the rally took place at the start of a week when the Treasury Department plans to issue a record $123 billion of Treasuries.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Technically, for the last four trading days, West Texas Intermediate has been trading at a high correlation to the dollar and that should remain the main directional theme.”

However, Jakob said: “If we are trading a dollar bubble, it is only normal that after all assets have risen on the falling dollar, they all fall when the Dollar Index goes higher. Lawmakers are wasting a lot of time combating [business executives’] bonuses, but the fundamental problem in 2008 and again in 2009 is rather the breakdown of diversification across asset classes driven by high-frequency algorithmic computers. When the competitive trading advantage comes down to how fast your computer is running, the conditions are created for running from one bubble to another until markets cease to exist. It is not really the dollar traded per se that is too crowded but rather high frequency and algorithmic trading.”

Pritchard Capital analysts noted, “A stronger dollar is problematic for higher crude prices, but backdrop from the emerging world—led by China—is supportive of the higher price.” They said, “Outside of the currency-related crude [price] drop, demand for crude and other commodities from China remains robust.” Chinese coal imports jumped 155% in January–August from year-ago levels. The country’s iron imports increased 33%, and copper imports were up 44%. Imports of crude into China in September were 25% above the same month in 2008; monthly imports have been above 2008 levels since April.

In Houston, analysts with Raymond James & Associates Inc. cautioned that although crude is at its lowest price since Oct. 16, the prices still is up 76% since the start of 2009. The Oil Service Index fell in lockstep with crude in the latest session, down nearly 2.3% and underperforming the broader market, with the Dow Jones Industrial Average down roughly 1.1%. “On Main Street, prices at the pump climbed to a 4-month high of $2.67/gal, gasoline's highest price since June 23,” Raymond James analysts said.

Jakob said problems with a fluidized catalytic cracker at the 500,000-b/d Hovensa LLC refinery on St. Croix in the US Virgin Islands and “a series of glitches in the US” provided strong support on the gasoline crack and the gasoline-to-heating oil spread “that is moving close to parity” for the winter. He said, “The US current refining economics should ensure that processing units that have been temporarily shut for economic reasons start to be heated up again. A high flat price and favorable refining economics in an environment of spare production and spare refining capacity will translate in both higher supply of crude and products, and the corrective waves should appear faster than in 2007-early 2008 when there was no known spare capacity on the supply or on the refining side.”

Meanwhile, Jakob said, “On the nuclear issue, Iran continues to send mixed signals, and we should not be surprised if it asks for an intermediary solution. With renewed violence in Iraq and continued hostilities in Afghanistan, the US has anyway little solution other than solving the ‘Iranium’ issue through diplomacy.”

Energy prices
On Oct. 26, the December and January contracts for benchmark US sweet, light crude each lost $1.82, closing respectively at $78.68/bbl and $79.37/bbl on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was down $1.82, matching the December futures contract at $78.68/bbl. Heating oil for November delivery decreased 4.21¢ to $2.03/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 1¢, also to an average $2.03/gal.

The November contract for natural gas dropped 27.4¢ to $4.51/MMbtu on NYMEX. On the spot market, gas at Henry Hub, La., fell 30.5¢ to $4.55/MMbtu.

Pritchard Capital Partners reported, “Natural gas fell in sympathy with crude and the possibility of warming weather this week in the northeastern US.” Some price volatility is expected ahead of the Oct. 28 expiration of the November contract as the United States Natural Gas Fund rolls its November exposure to December. “The market capitalization of the fund is approximately $3.9 billion, and size or success constantly raises flags from the regulators,” the analysts said. “It must have an impact on the price of natural gas, but it is almost impossible to quantify its impact.”

In London, the December IPE contract for North Sea Brent lost $1.66 to $77.26/bbl. Gas oil for November dropped $8.25 to $636.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 89¢ to $76.70/bbl Oct. 26. So far this year, OPEC’s basket price has averaged $57.91/bbl, down from an average $94.45/bbl for all of 2008.

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