MARKET WATCH: Crude prices dip as dollar strengthens

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 23 -- Crude prices pulled back slightly Oct. 22, still influenced more by the fluctuating value of the US dollar than by market fundamentals of supply and demand.

“Oil prices slowed down, put the car in neutral, and let a stronger dollar push it downhill just a little bit, as oil traded marginally lower,” said analysts in the Houston office of Raymond James & Associates Inc. “Oil was helped by the Dow [Jones Industrial Average]'s return to 10,000-plus but was weakened after comments from the Organization of Petroleum Exporting Countries led to speculation that its members will agree to increase production at its December meeting.”

They said, “Natural gas prices fell 3% after the Energy Information Administration reported a neutral injection of 18 bcf, in-line with consensus estimates and bringing gas in storage to 3.734 tcf. Keep in mind that with every injection going forward, gas in storage will be at a new all-time high.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Technically, West Texas Intermediate still managed to find support on the 5-day moving average so it is too early to call off the positive momentum, but we would start to have a bit more of a cautious approach to the [upward price] trend.”

He said, “On the supply side, if the current rally is being demand driven (we do not think so) then OPEC will gradually increase production since it has the additional capacity and since there would be a demand pull on the barrels. If the rally is not demand driven (we think so) then the smaller OPEC nations will gradually leak more oil as they would be foolish not to use this spike to average on the lost revenues of the first half of the year. Saudi Arabia might stick to quotas, but the clear risk is to see the other OPEC members starting to increase the loading tolerance.”

Jakob said, “It is difficult to call the top in a market that is under the influence of the dollar and in the run-up to the main options month, but the higher the prices go now the higher the risk of more supply coming on top of still large stock layers and this should favor the recreation of the full storage contango in crude oil.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “OPEC will meet in Angola on Dec. 22, and the ministers are more worried about the impact of high oil prices on the economic recovery than they are about the fact that the ‘call on OPEC crude’ is not improving much in 2010. Sec. Gen Abdalla el-Badri recently told reporters that OPEC would consider an increase in output if prices stayed above the $75-80/bbl range. He qualified this by saying such a decision would require elimination of floating storage, and stockpiles returning to the 5-year average.”

Crude stocks among members of the Organization for Economic Cooperation and Development fell to 2.75 billion bbl in August “via a combination 4 million bbl draw and a 25 million bbl downward revision from July levels,” said Sieminski. “Floating crude storage has been reduced but appears to have been offset by floating distillates.” Traditional fundamentals are improving, “but only slowly,” he said.

“We believe OPEC is in a difficult position if history is guide,” Sieminski said. “In the aftermath of the Asia crisis and the Sept. 11 attacks on the US, oil prices rallied by approximately 60% and 100% in the 8 months from those recessions-induced lows. These rallies occurred following roughly 4.75 million b/d of OPEC production cuts and as global growth recovered. Even so OPEC had to wait up to 15 months for the oil price to stabilize from the start of its production cutting cycle.”

He said, “The difference in this cycle has been that oil prices started to recover just 5 months into OPEC's production cutting cycle and that the recovery in oil prices has been significantly more powerful, rising by almost 140% since the February 2009 low. Has the recovery been too fast?”

Sieminski said, “Given our belief that the US dollar will hit fresh lows against the euro over the next few quarters, it suggests that oil price advances have even further to run. This short-term view is supported by our expectation that real economic data in the US and elsewhere will continue to indicate a strengthening in demand into the first half of next year. We believe that $80 oil is not high enough to derail the global recovery, but our economics team would start looking for weaker overall consumption at $100/bbl prices.” Meanwhile, he said, “OPEC may want to calm the markets with more crude, but it's not clear that refiners have an appetite to take it.”

Energy prices
The December contract for benchmark US light, sweet crude dropped 18¢ to $81.19/bbl Oct. 22 on the New York Mercantile Exchange. The January contract lost 12¢ to $81.84/bbl. On the US spot market, WTI at Cushing, Okla., was down 18¢ to $81.19/bbl. Heating oil for November delivery declined 1.07¢ to $2.09/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month decreased 1.01¢ to $2.04/gal.

The November contract for natural gas fell 15.3¢ to $4.95/MMbtu on NYMEX. On the spot market, however, gas at Henry Hub, La., escalated 15.5¢ to $4.98/MMbtu.

In London, the December IPE contract for North Sea Brent lost 18¢ to $79.51/bbl. Gas oil for November increased $4.75 to $653.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes climbed by $1.24 to $77.61/bbl Oct. 22.

Contact Sam Fletcher at [email protected].