MARKET WATCH: Energy prices continue to see-saw

Fluctuations in the value of the dollar and in economic indicators continued to whipsaw energy prices Oct. 21 as the new front-month December crude contract fell 2.4% in the New York market and natural gas dropped to its lowest level in more than a year.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 22 -- Fluctuations in the value of the dollar and in economic indicators continued to whipsaw energy prices Oct. 21 as the new front-month December crude contract fell 2.4% in the New York market and natural gas dropped to its lowest level in more than a year.

Crude closed just above $80/bbl “on a higher dollar and lackluster employment data,” said analysts in the Houston office of Raymond James & Associates Inc. “So far in October, crude's trading range has been a much tighter $80-83/bbl.”

The previous front-month crude contract for November fell $1.44 to a near 2-week low of $81.25/bbl on Oct. 15, but after the weekend rebounded to $83.08/bbl Oct. 18 for the biggest 1-day increase for the month at that point. It then dropped to $79.49/bbl Oct. 19 in the biggest 1-day decrease in both percentage and amount since February. The November contract bounced back to expire at $81.77/bbl on Oct. 20.

“Down $3/bbl, up $3/bbl, down $3/bbl,” observed Olivier Jakob at Petromatrix, Zug, Switzerland. “Crude oil continues to trade within a relative small range but with an unusual pattern of covering the range each trading day. It can do that for a while, but there will be at one stage a volatile breakout of the recent range.”

The overall influence of the US dollar across asset classes was evident Oct. 19-20, but on Oct. 21 there was a change of trading pattern, Jakob noted. “US equities benefited from their own strength as index traders were focused on having the Dow Jones Industrial Average and the Standard & Poor’s 500 index penetrate the resistance of recent highs. The euro was not successful in sustaining a break of the resistance…but the reversal in the dollar was not that huge and nothing in comparison to the volatility seen [earlier],” he said.

“Yesterday, we had the US equities trying to move higher on their own technical targets while crude oil was moving lower with greater velocity than in changes to the dollar. The fact that crude oil was able to suffer from price pressure on its own at the top of the recent range is interesting as it could start to indicate some fatigue from the large speculators that are holding record long positions in West Texas Intermediate,” he said.

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Leon Westgate said the December crude futures contract climbed back above $81/bbl in early trading Oct. 22. “Front month WTI has been in a very narrow trading range of $79-85/bbl for the last 3 weeks, basically since front month WTI hit a recent high at $84.38/bbl on Oct. 7. Technically speaking, it has been moving around its short-term moving averages, but essentially trading sideways with no real direction so far.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Shackled to the currency markets, crude slipped as the dollar appreciated 0.3% against the euro [on Oct. 21]. Additionally, the crude processing by the Chinese refineries grew by only 6.6% year-over-year in September, the least since March 2009, potentially signaling a demand slowdown. The market is now anxiously waiting for the home sales data, which comes out Oct. 25, as the housing recovery remains the key to the stabilization of the domestic economy and the market will be looking for any positive signs on that front.”

Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC, observed the latest estimates by the International Energy Agency, the US Department of Energy, and the Organization of Petroleum Exporting Countries have shown little change in oil supply and demand fundamentals. “OPEC's market share in 2011 may improve modestly, but spare capacity remains elevated. We believe the main upside price risks stem from the S&P 500 and the dollar rather than physical fundamentals,” he said.

“While the US has been the traditional delivery point for European and French gasoline exports, we believe the impact of the French strike on the US gasoline market will be relatively limited given ample US gasoline inventories. However, this assumes French industrial action will not persist for too long,” Sieminski said.

In the gas market, Raymond James analysts said, “The Energy Information Administration reported a 93 bcf storage injection [in the week ended Oct. 15], which was well above consensus estimates (88 bcf) and helped to push gas down 4.8%.”

They reported, “This month's downward spiral has been reminiscent of last year's gas slide and some traders are betting the November contract breaches the $3/Mcf level. November is already a full $1.60 lower than prices this time last year.” Energy stocks also ended the session in the red, they said.

Sieminski said, “Gas storage appears to be on a nearly inexorable climb to a new record high. We believe the only good news on the horizon is that prices have now fallen to a level that will eventually lead to more demand and less supply.”

Energy prices
The new front-month December contract for benchmark US light, sweet crudes fell $1.98 to $80.56/bbl on the New York Mercantile Exchange. The January contract dropped $1.93 to $81.33/bbl.

On the US spot market, WTI at Cushing, Okla., lost $1.71 to $80.06/bbl with expiration of the November crude futures contract. Heating oil for November delivery was down 4.03¢ to $2.21/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 4.16¢ to $2.04/gal.

The November natural gas contract dropped 17.1¢ to $3.37/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 7.5¢ to $3.43/MMbtu.

In London, the December IPE contract for North Sea Brent crude dropped $1.77 to $81.83/bbl. Gas oil for November declined $1.75 to $704.25/tonne.

The average price for OPEC's basket of 12 reference crudes increased by 55¢ to $79.26/bbl.

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