MARKET WATCH: Bearish gas report, stronger dollar lower energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 8 -- Energy prices fell Oct. 7 with the front-month crude contract coming off a 5-month high, reached through rallies in five of the previous six trading sessions on the New York market, as a favorable US jobs report provided support for the dollar.

“Both crude and natural gas closed the day in the red, down 1.9% and 6.4% respectively,” said analysts in the Houston office of Raymond James & Associates Inc. Gas prices fell after the Energy Information Administration reported a bearish injection of 85 bcf into US underground storage in the week ended Oct. 1, well above the consensus estimate of 78 bcf (OGJ Online, Oct. 7, 2010).

At Standard New York Securities Inc., part of the Standard Bank Group, analyst Walter de Wet said, “The sell-off in crude comes on the back of dollar strength,” which continued Oct. 8. It showed the fragility of the oil market without strong fundamental support.” He said, “Although we believe oil is very likely to stay range-bound well into the fourth quarter, we are cautious on a break-out on the upside caused by increased dollar liquidity by some new Federal Reserve Bank policy.”

Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC, said, “We see continuing pressure on US natural gas price based on evidence that high heating intensities this summer may have been underestimated. We have raised our fourth quarter oil price forecast to $80/bbl, based on the likelihood that a higher Standard & Poor’s 500 index and weaker US dollar will support the oil market.”

Sieminski observed global demand growth for jet fuel and kerosine is up 2% so far this year, driven by a recovery in air traffic. “If this growth rate is sustained for the rest of the year, 2010 will be the first year we observe demand growth since 2007,” he said.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Crude oil had a strong price set-back yesterday but there was no change to the oil fundamentals. It is just that the oil fundamentals were never behind the $10/bbl gained since Sept. 24. We take yesterday’s setback as a first warning that QE2 [the second round of ‘quantitative easing’ by the Federal Reserve in an effort to boost the economy] starts to be already priced-in” (OGJ Online, Oct. 7, 2010).

Jakob said, “The dollar correlation has been increasing across asset classes, and we believe that this starts to be an increasing systemic risk [that] is not well taken in account in traditional measures of risk or in the volatility index.”

Meanwhile, he said, “We have not seen one economist volunteer to say that QE2 will solve the US unemployment problem within the next 12 months. Maybe QE10 would, but that would be at the expense of the rest of the world, which in the end is a zero-sum game.”

Jakob said, “The expectations of QE2 have transformed the world arena again into a big boxing ring, and the resulting increase in global political risk is a negative for economic growth and confidence. The interesting thing about the expectations of QE2 is that it has contributed to an asset price increase but also to increasing concerns about the side effect of the medicine. Given that the markets have been pricing QE2, it is now allowing the US Fed to have a better feel of what could be the global reaction to it and we will not discount that the Fed could start to weigh the asset price benefits vs. the breakdown of global political coordination and the greater loss of confidence in the market valuations (the expectations of QE2 have not stopped outflows from equity mutual funds, or brought more volume to the stock markets).”

US stocks of natural gas have increased in the last 4 weeks “at a greater than average speed and overall levels are trending back to the highs of last year,” Jakob said. “The US has no shortage of energy stock cushion. Going into the winter, natural gas is priced at the lowest price since 2003 while heating oil is at the second highest winter price ever. Despite the [price] spread between oil and gas—which should maximize the use of natural gas—the rate of growth in gas stocks is not declining.”

Energy prices
The November contract for benchmark US light, sweet crudes dropped $1.56 to $81.67/bbl Oct. 7 on the New York Mercantile Exchange. The December contract fell $1.61 to $82.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.56 to $81.67/bbl. Heating oil for November delivery lost 5.6¢ to $2.25/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 3.79¢ to $2.12/gal.

The November contract for natural gas fell 24.8¢ to $3.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 10¢ to $3.51/MMbtu.

In London, the November IPE contract for North Sea Brent lost $1.63 to $83.43/bbl. Gas oil for October dropped $12.50 to $721/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 44¢ to $81.07/bbl.

Contact Sam Fletcher at [email protected].