MARKET WATCH: Crude oil, natural gas prices rebound

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 11 -- Crude oil prices rose Oct. 8 in the sixth rally over eight sessions in the New York market. Natural gas was up, too, on speculation it has bottomed out after earlier dropping to $3.58/MMbtu—the lowest price since Sept. 22, 2009.

Gas futures prices fell 6.4% Oct. 7 when the Energy Information Administration reported a larger-than-expected US stockpile increase.

“Crude prices rose 1.5% as the dollar remained near 15-year lows vs. the yen and weakened against other major currencies,” said analysts in the Houston office of Raymond James & Associates Inc. “Despite a weaker-than-expected September jobs report, equity markets rallied to reach fresh highs last Friday. The Dow Jones Industrial Average rose 1% and ended the day above the psychologically important 11,000 level for the first time since May.”

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “Crude oil has had an impressive price rally in the last 3 weeks. Front-month West Texas Intermediate future contract gained $9/bbl (a 12.2% increase). The noncommercial participants, whose positions are required to be reported to the US Commodity Futures Trading Commission, built a net length not seen since April.”

According to CFTC, net position in crude futures held by noncommercials shot up 164% in net length over the last 3 weeks, and net position in crude futures and options held by noncommercials increased 42% in net length. “The current net long is not far off the record length held by noncommercials in crude futures and options, reached at the beginning of April this year,” said De Wet.

He said, “The renewed bullish spirit by the noncommercials has been fuelled by the belief that the US Federal Reserve would start a fresh round of quantitative easing (QE2) in November. The US dollar has been duly weakening. The impact on the oil price became rather evident late last week when a better-than-expected jobless claim numbers [on Oct. 7] saw the crude oil price slip, while a worse-than-expected nonfarm payroll number on [Oct. 8] appeared to move the oil price up. The market simply took its cue from these macro data on the likelihood of the Fed’s new QE II program.”

Besides a weakening dollar, other factors curbing investment into the oil market include diminishing incentives to store oil, a seasonal pickup in oil demand as winter approaches, and the exposure to different political risks evidenced by the terrorist attack at the Nigeria capital Lagos on Oct. 2. “However, we believe that record high oil inventories in most regions should prevent price spikes in the short- and medium term,” De Wet said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The amount of cash held by US Commercial Banks remains about $800 billion higher than in the first half of 2008, and it is not clear what adding another $800 billion of liquidity will do to the real economy if industries are anyway reluctant to invest as the economic forecasts are being revised lower. The current extension in the interruption of sales of foreclosed homes (Bank of America announced Oct. 8 it was expanding the ban to all 50 states) will not help the housing sales data or the financial results of the banking sector. The recent developments and growing mess in the foreclosing business will need to be monitored.”

Crude oil futures prices last week hit their highest levels since May, briefly breaking above $85/bbl before prices eased from the highs towards the end of the week. “The surge resulted from a cocktail of factors. High up on the list is the market’s belief that the US will soon adopt further stimulus measures for the economy, which would keep the dollar low and boost equities, both of which would tend to support oil prices. Fresh signs that the Chinese economy is still booming and less weak than expected recent economic data in the US, have also helped. While the market has for now turned its gaze away from weak oil market fundamentals and the simmering debt crisis in Europe, however, we continue to believe that these will prove a drag on prices in the coming months,” said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK.

KBC analysts said, “The break in crude oil prices above $80/bbl couldn’t have been better timed. The Organization of Petroleum Exporting Countries is to meet in Vienna on Oct. 14, and the ministerial meeting will be preceded by discussions in Kuwait…on the gulf members’ position ahead of the talks. When OPEC met in March this year, Saudi Oil Minister Ali Naimi said that prices at the time were “beautiful” and the poor performance by OPEC members with agreed production cuts was barely mentioned. If prices were to rise significantly above $80/bbl on a sustained basis, it would potentially cause concern for large gulf producers who don’t want high prices to damage the economic recovery. But if prices did spiral higher, we believe Saudi Arabia would simply use the spare capacity it holds to dampen the price rise. OPEC will find it easier to live with poor compliance and high prices than open the Pandora’s Box of how to allocate any formal increase in production by revising quotas. The kingdom is keen to regain the market share it lost to Russia (among others) as a result of its own production restraint. Prices have held in the $70-80/bbl range for most of this year despite OPEC compliance that at times has drifted as low as 50%.”

‘Obamatorium’
Meanwhile, “Obamatorium” has joined “Obamacare” as two economic disasters chalked up by opponents against President Barack Obama’s administration. Raymond James analysts advised Oct. 11 for investors to “play the jack ups, fold the floaters” in the current “offshore driller shuffle.”

They reported, “Floaters are in the doldrums, as the Obamatorium could wreck havoc on the Gulf of Mexico floater market into late 2011 or early 2012. While the ultradeepwater market may maintain current day rates ($400,000/day), older deep and midwater assets could feel pressure on rates and utilization.” On the other hand, they said, “The high-spec jack up market is the only offshore drilling group with any near-term momentum as day rates continue to rise. Standard jack up dayrates are stable, and could benefit from continued strength in the high-spec market.”

This has been a rough year for stocks of offshore drilling contractors because of fallout over the Macondo accident in the gulf. “While the broader markets and oil service indexes are roughly flat year-to-date, the offshore drilling group is down, on average, over 15%,” Raymond James analysts reported. “The bottom line is that the timing and magnitude of the offshore drilling recovery will be more asset-specific than any cyclical offshore driller upswing in the past few decades. While valuations are attractive for those with long-term horizons, we think this offshore recovery will generally take longer than many think. That means offshore drilling investors should focus on international-driven jack ups, particularly higher-spec, for the short term, and leave the floaters to those with much longer-term horizons.”

The analysts said, “The main reason for our near-term pessimism is that it appears the current offshore US deepwater moratorium is likely to morph into an ‘Obamatorium’ where the drilling moratorium is technically lifted but drilling does not rebound due to Obama administration-directed permitting delays. Additionally, ongoing deliveries of (pre-meltdown ordered) rig new-builds mean that offshore drilling capacity is likely to increase in an already oversupplied market. Our main conclusions and the offshore drilling winners and losers are as follows: (1) the ‘Obamatorium’ will depress US offshore activity greater and longer than many expect—(everyone including US energy consumers lose); (2) much like the US land rig market, there is an increasing bifurcation in the jack up arena, as operators continue to pay a premium for high spec rigs; (3) Shallow water and low-end jack ups likely suffer for several years; Ultra-deep floater rates should stabilize in the near term but not improve meaningfully until 2013. “

Energy prices
The November contract for benchmark US light, sweet crudes regained 99¢ to $82.66/bbl Oct. 8 on the New York Mercantile Exchange. The December contract increased 97¢ to $83.35/bbl. On the US spot market, WTI at Cushing, Okla., was up 99¢ to $82.66/bbl. Heating oil for November delivery increased 3.01¢ to $2.28/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 3.32¢ to $2.15/gal.

The November natural gas contract climbed 3.4¢ to $3.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 22.5¢ to $3.29/MMbtu.

In London, the November IPE contract for North Sea Brent crude was up 60¢ to $84.03/bbl. Gas oil for October increased 75¢ to $721.75/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped $1.12 to $79.95/bbl. So far this year, OPEC’s basket price has averaged $75.40/bbl.

Contact Sam Fletcher at samf@ogjonline.com.