MARKET WATCH: Central banks trigger jumps in crude, gold prices

Crude oil and gold prices escalated Oct. 5 as investors put their money into hard assets as central banks moved to reduce the value of their national currencies. Natural gas also inched up 0.4% in the New York futures market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 6 -- Crude oil and gold prices escalated Oct. 5 as investors put their money into hard assets as central banks moved to reduce the value of their national currencies. Natural gas also inched up 0.4% in the New York futures market.

“Markets were firing on all cylinders yesterday, as both crude and the broader market reached highs not seen since May,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude rose 1.7% on the trifecta of a weak dollar, positive economic data, and the delayed reopening of the Houston Ship Channel.”

At Standard New York Securities Inc., part of the Standard Bank Group in the UK, analysts said, “West Texas Intermediate has continued to push higher during London trade [on Oct. 6], with momentum buying briefly pushing prices above $83/bbl for the first time since early May.” The $83/bbl price “is emerging as a key level and will likely be a bit of a battleground this afternoon,” they said.

The dollar weakened when the Bank of Japan announced it would cut its overnight interest rate to between zero and 0.1% [as the US Federal Reserve did much earlier ago] and pledged to buy ¥5 trillion ($60 billion) worth of assets to stimulate the national economy. Expectations of similar actions by other banks pushed gold to record highs above $1,325/oz. The price of gold is already up 18% so far this year, rising much faster than global liquidity, said Standard Bank analysts.

“Speculation continues to grow that the US Federal Reserve will follow Japan's lead and take additional measures to boost the economy,” Raymond James analysts reported.

Financial ‘hara-kiri?’
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Central Banks continue their drive towards global hara-kiri, and across all markets there is only one word being pronounced: ‘QE.’” That stands for “quantitative easing” of the economy such as the Fed’s earlier unprecedented purchase of debt to prop up the US housing market and credit facilities for big banks. Jakob noted the New York Fed conducted on Oct. 5 a “permanent open market operation” (POMO) via a $5.2 billion purchase of Treasury coupons and is expected to conduct another POMO on Oct. 6 at an estimated $2.6 billion.

“In the current state of affairs the oil fundamentals are totally irrelevant and even the macroeconomic data is starting to be irrelevant (bad macroeconomic data is bullish as it increases the odds of the Fed opening the QE spigot),” Jakob said. “The notion being created that fundamentals don’t matter is erasing the price limit of assets, but as we argued in 2008, in the end the fundamentals come back to bite, and we will therefore continue with our strategy of buying ‘puts’ on WTI into the [US Fed Chairman Ben S.] Bernanke rally. We prefer to use options rather than futures because timing the top of the Bernanke hype is difficult. We are, however, pretty sure of one equation: as long as equities are driven by the hope of the Fed buying assets into QE2 and as long as oil maintains its correlation to equities there will never be an economic recovery.”

He said, “Each time crude oil has approached $90/bbl the world economy has been thrown into chaos, and we find it interesting that governments are ready to engage in more QE experiments, but there is not one single voice to suggest that maybe lower oil prices would actually help the global economy and that maybe the Organization of Petroleum Exporting Countries is just terribly wrong in its assessment of what is the fair price for consumers.”

In other news, striking workers at France's Fos-Lavera port blocked more tankers, threatening to idle several refineries within a few days and create a gasoline shortage in Europe. Meanwhile, the US Coast Guard said equipment was in place to remove a leaning power line tower over the Houston Ship Channel that has closed the northern part of the waterway since Oct. 3 (OGJ Online, Oct. 5, 2010). There are 11 inbound tankers waiting for clearance to refineries up the channel that may have to reduce production soon if not resupplied.

US inventories
The Energy Information Administration said Oct. 6 commercial US crude inventories expanded by 3.1 million bbl to 360.9 million bbl in the week ended Oct. 1, exceeding Wall Street’s consensus for a 400,000 bbl increase. Gasoline stocks fell 2.6 million bbl to 219.9 million bbl, well below analysts’ expectations of a 300,000 bbl decline. Both finished gasoline and blending components diminished. Distillate fuel inventories dropped 1.1 million bbl to 172.5 million bbl compared with an outlook for 1 million bbl decline. All three categories remain above average for this time of year, said EIA.

The American Petroleum Institute earlier reported crude stocks increased 4.4 million bbl to 366.1 million bbl last week, with gasoline inventories down 4.1 million bbl to 226.7 million bbl and distillate stocks down 777,000 bbl to 166.4 million bbl.

Imports of crude into the US declined by 79,000 b/d to 8.9 million b/d in that same week, EIA reported. In the 4 weeks through Oct. 1, crude imports averaged 9.1 million b/d, a 262,000 b/d decline from the comparable period in 2009. Gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 713,000 b/d while distillate fuel imports averaged 179,000 b/d.

The input of crude into US refineries fell 515,000 b/d to 14.2 million b/d last week, with units operating at 83.1% of capacity. Gasoline production decreased to 8.8 million b/d. Distillate fuel production was down to 4.2 million b/d, said EIA.

Energy prices
The November contract for benchmark US light, sweet crudes climbed as high as $82.99/bbl in intraday trading Oct. 5 on the New York Mercantile Exchange before closing at $82.82/bbl, up $1.35 for the day. The December contract jumped $1.44 to $83.64/bbl.

On the US spot market, WTI at Cushing, Okla., was up $1.35 to $82.82/bbl. Heating oil for November delivery increased 1.79¢ to $2.30/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 3.22¢ to $2.13/gal.

The November natural gas contract gained 1.6¢ to $3.74/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 3¢ to $3.52/MMbtu.

In London, the November IPE contract for North Sea Brent crude advanced $1.56 to $84.84/bbl. Gas oil for October lost $3.25 to $723.75/tonne.

The average price for OPEC’s basket of 12 reference crudes was up 19¢ to $80.14/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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