MARKET WATCH: Obama bank attack brings down equity, oil markets

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 22 -- Despite a relatively bullish government report on inventories, oil prices continued to fall Jan. 21, pulled down by negative reaction in the equities market to US President Barack Obama’s proposed crackdown on the banking industry.

“Obama's vow to impose tougher regulations on bank risk-taking sent the market spiraling yesterday (Dow Jones Industrial Average down 200 points) and took energy stocks down with it (Oil Service Index down 2% and the Standard & Poor's exploration and production index down 1%),” said analysts in the Houston office of Raymond James & Associates Inc. “One of the regulations calls for the elimination of proprietary trading for banks and financial institutions, a massive blow to the major banks, and one that many contend will hurt liquidity in the markets.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The president’s line of action against the bank’s trading desks and investments in hedge funds will be a concern for the stability of some investment flows in the global market place. However, it will not happen overnight and will face some very strong lobbying that could water down some of the initial intentions. For commodities, the more immediate and material concern should be focused on the implementation of the new Commodity Futures Trading Commission (CFTC) proposed rule on position limits.”

He said, “The CFTC is putting the Street up against the wall with rules on limits that should force some of the largest banks to choose between speculative trading and being a swap provider in commodities, and this will not be dependent on the broad reforms in the banking sector wanted by President Obama. The CFTC proposal covers many potential loopholes and if we thought the proposal was pretty harsh for the business line of some of the large Wall Street commodity banks, after hearing the president yesterday we are more convinced then ever that the CFTC is for real. We will therefore increase our risk factor for liquidation and de-leveraging of positions in commodity indices in the fourth quarter 2010 [or] the first quarter of 2011.”

Meanwhile, the Energy Department’s Energy Information Administration reported commercial US crude inventories decreased by 400,000 bbl to 330.6 million bbl in the week ended Jan. 15, counter to Wall Street’s consensus for a 2.4 million bbl increase. US gasoline stocks gained 3.9 million bbl to 227.4 million bbl, exceeding Wall Street’s expectations of a 2 million bbl gain. Distillate fuel inventories fell 3.3 million bbl to 157.1 million bbl, still above average for this time of year. Analysts had anticipated virtually no change in distillate stocks (OGJ Online, Jan. 21, 2010).

Input of crude into US refineries declined 181,000 b/d to 13.8 million b/d with units operating at 78.4% of capacity. Gasoline production increased to 8.6 million b/d; distillate fuel production decreased to 3.5 million b/d.

EIA also reported the withdrawal of 245 bcf of natural gas from US underground storage in the week ended Jan. 15. That left 2.6 tcf of working gas in storage. That’s 22 bcf more than in the same period a year ago but 6 bcf below the 5-year average. “However, with warmer weather forecast for the next couple of weeks, expect this surplus to increase. Gas prices ended the day up 2%,” Raymond James analysts said.

“On the oil front,” they said, “the DOE reported a build in petroleum inventories of 1.6 million bbl, a relatively bullish number compared to the consensus estimate of a build of 4.4 million bbl. However, oil prices were unimpressed as traders focused on the anemic refinery utilization number and crude ended the day down 2% to close at the lowest level of 2010.”

Jakob noted total stocks of clean petroleum products were unchanged in Petroleum Administration for Defense District 1 (PADD 1) on the US East Coast and are still at multiyear highs for the season. “Most of the reported build in gasoline was in the Midwest (PADD 2). Crude and all products combined there was a stock reduction of 1.6 million bbl but that was with a stock draw of 4.8 million bbl in propane and propylene. When considering crude and the main clean petroleum products, there was a stock build of 1.5 million bbl,” Jakob said. “On the positive side, stocks in Cushing, Okla., were reduced further during the week but they remain at par to the high levels of last year.”

He reported, “A few banks continue to massage the message that the statistics are bullish because we are narrowing the surplus to the 5-year stock average. Given that the 5-year average now includes the extraordinary stock levels of 2009, we would continue to be very careful in taking a market view based on that indicator.”

Jakob cautioned, “Yesterday the CEO of Enbridge Inc. announced that the Alberta Clipper pipeline from Canada to the Midwest will start operations in early April rather than in the third quarter. Combined with the start-up of the Keystone pipeline this means that we suddenly have 900,000 b/d of additional pipeline capacity from Canada to the US Midwest starting in the second quarter. The line fill is taking some crude off the market, and it will take some time before the increase in Canadian production matches the pipeline capacity increase. But given that the Enbridge Southern Lights pipeline (carries diluents up north to increase the flow rate of the crude oil coming south) will also start ahead of schedule, we should nevertheless expect to see increased flows from Canada to the Midwest in the second half of 2010, and we maintain our estimate that the US Midwest will have cut to zero its dependency on non-Canadian foreign crude oil by the end of this year.”

He added, “The dollar index stopped its recent surge as it has to balance between the fear of Obama and the fear of Greece. Crude oil is still, however, over-valued to the euro-crude correlation model by about $7/bbl.” The economic crisis in Greece is expected to worsen this year.

Energy prices
The new front-month March contract for benchmark US light, sweet crudes dropped $1.66 to $76.08/bbl Jan. 21 on the New York Mercantile Exchange. The April contract fell $1.70 to $76.53/bbl. On the US spot market, West Texas Intermediate at Cushing was down $1.76 to $75.86/bbl. Heating oil for February delivery declined 3.55¢ to $1.99/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 6.36¢ to $1.98/gal.

The February natural gas contract regained 11.9¢ to $5.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $5.53/MMbtu.

In London, the March IPE contract for North Sea Brent crude dropped $1.74 to $74.58/bbl. Gas oil for February lost $2 to $612.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 76¢ to $74.54/bbl on Jan. 21.

Contact Sam Fletcher at samf@ogjonline.com.