MARKET WATCH: Bearish economic reports bring down energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 6 -- Energy prices declined Aug. 5 following the fall of equities in the New York market in the wake of bearish economic reports, but crude managed to remain just above $82/bbl.

Natural gas was down 3%, wiping out gains from the previous session, despite a fairly neutral report by the Energy Information Administration indicating a smaller-than-expected injection of 29 bcf into US underground storage in the week ended July 30 (OGJ Online, Aug. 5, 2010).

The front-month crude contract dropped 0.6% on a government report initial jobless claims “unexpectedly increased by 19,000 to 479,000 while economists were expecting claims would fall to 455,000,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. Earlier, moderate demand pushed the US gasoline inventory higher as refinery utilization increased in the week ended July 30 (OGJ Online, Aug. 4, 2010).

“With the economic recovery potentially moderating in the second half of this year, prices will need some significantly positive economic data to justify staying at the current level,” Sharma said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, observed, “Oil prices in 2007-08 seemed linked to shifts in the value of the dollar. Since 2009, the Standard & Poor’s 500 index appears to be the main driver. We are not convinced that recent dollar weakness and S&P strength can be relied upon to consistently drive oil prices upward over the next 6 months, particularly in an environment where crude oil and product inventories have been slow to fall.”

Still, he said, “From a demand perspective, the US summer driving season has been stronger than expected. June-July gasoline demand is up 1.9% year-over-year. However, demand continues to be insufficient to eat through the high level of inventories.”

As for natural gas, Sieminski said, “The continuing surge in shale gas production in the US raises the possibility that the US might export LNG rather than import it. A minimum spread of $3.62/MMbtu on top of Henry Hub prices would likely be required to generate a positive netback on a sustained basis.”

In a separate report, Sieminski said total returns on the Deutsche Bank’s crude oil index rose 3.6% in July “but are 9.1% lower since the end of 2009.” He said, “With supply and demand fundamentals in rough equilibrium and the call on the Organization of Petroleum Exporting Countries’ crude oil not under much upward pressure, the broad oil supply and demand picture for 2011 appears to be very similar to 2010. In our view, the short-term oil pricing outlook remains fragile with excessively high levels of Organization for Economic Cooperation and Development crude oil inventories and ample OPEC spare capacity. We believe that the long-term case for strength in WTI is still a good one, but in the short-term, shifting views on the overall economic outlook appears to have an exaggerated impact on oil market sentiment.”

Total returns on Deutsche Bank’s heating oil index rose 2.4% in July but is still 6.4% lower then at the end of 2009. “Trading in a range from $1.80-2.20/gal over the last year, heating oil prices are currently near the top end,” said Sieminski. “With US distillate days of supply at a high level of around 46 days, when 33 days' supply would be more typical for this time of the year, we believe excess stocks will tend to cap heating oil prices.”

Energy prices
For the second consecutive session, September and March contracts for benchmark US light, sweet crudes fell by identical amounts, this time down 46¢ each to respective closings of $82.01/bbl and $82.45/bbl on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., also was down 46¢ to $82.01/bbl. Heating oil for September delivery dropped 1.54¢ to $2.19/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.06¢ to $2.16/gal.

The September natural gas contract fell 13.9¢ to $4.60/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 8.5¢ to $4.85/MMbtu.

In London, the September IPE contract for North Sea Brent crude lost 59¢ to $81.61/bbl. Gas oil for August dropped $5.50 to $688/tonne.

The average price for OPEC’s basket of 12 reference crudes declined 19¢ to $78.69/bbl.

Contact Sam Fletcher at [email protected]