Equities market, GDP rattle oil prices

Aug. 6, 2007
Futures prices for crude and petroleum products took unusual bounces in the last full week of July, influenced by a falling equities market and US economic growth with virtually no immediate changes in supply and demand.

Futures prices for crude and petroleum products took unusual bounces in the last full week of July, influenced by a falling equities market and US economic growth with virtually no immediate changes in supply and demand.

The September contract for benchmark US light, sweet crudes traded at $73.10-76.38/bbl July 25 before closing at $75.88/bbl, up $2.32 for the day to recoup virtually all losses from the previous three sessions on the New York Mercantile Exchange as traders shrugged off a bearish inventory report. The Energy Information Administration said US crude inventories fell 1.1 million bbl to 351 million bbl in the week ended July 20. Gasoline stocks increased 800,000 bbl to 204.1 million bbl in the same period, still below average.

One reason for the bullish market was that US refineries operated at 91.7% of capacity during the week ended July 20, the highest level since September 2006. US gasoline production rose to 9.3 million b/d, while gasoline imports increased to 1.65 million b/d, the highest weekly average ever. That “created a counterseasonal build in gasoline,” said Paul Horsnell, Barclays Capital Inc., London. While 700,000 bbl of the gasoline build was on the West Coast, East Coast inventories fell for the first time in 6 weeks. Total distillate inventories rose 1.5 million bbl yet stayed below their 5-year average. Diesel inventories fell, and heating oil inventories rose by 2.9 million bbl.

The September crude contract traded as high as $77.24/bbl July 26 before closing at $74.95/bbl on NYMEX. The commodities market was pulled down as the Dow Jones Industrial Average (DJIA) plunged 311.5 points in its second worst session of the year as fears of shaky credit markets and the troubled housing industry swept Wall Street. NYMEX “reluctantly gave up the early session gains when it was apparent that the stock market slide would be too large to ignore,” said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

However, September crude jumped to $77.02/bbl July 27, just 1¢ short of tying the record-high NYMEX closing on the New York market after the Commerce Department reported a second-quarter jump in the US economy. The record high closing price for a front-month crude contract was $77.03/bbl on July 14, 2006, amid fears that fighting between Israel and Muslim militia in Lebanon might spread.

Gross domestic product growth-the best national barometer of economic fitness-jumped to 3.4%/year in the latest quarter from just 0.6%/year in the first, which marked the lowest GDP growth in 4 years. Although the DJIA continued to tumble as a result of the sour housing market, crude traders saw the increased GDP as indicating a greater demand for fuel.

Natural gas

Crude prices were choppy but trended upwards during the week. Natural gas futures prices also vacillated but followed a downward trend from a July 20 closing at $6.45/MMbtu to $6.11/MMbtu on July 27, despite a rally in the last three sessions before the August contract expired. The diverging paths of the two commodities further illustrated the breakdown of the pricing relationship between crude and natural gas, said analysts at the Societe Generale Group (SG) in Paris. “This week natural gas broke out of the competing fuel band and is now cheaper than residual fuel oil,” said SG analysts.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Gas markets could be headed for a late summer melt-down similar to...last year,” when front-month gas contracts “plunged from nearly $8/Mcf in early August to the low of $4/Mcf at the end of September.” Raymond James lowered its gas price estimates to $6/Mcf from $6.50/Mcf for the third quarter and to $6.50/Mcf from $7.50/Mcf for the fourth quarter. However, it raised its oil price estimate to $73/bbl from $67/bbl for the third quarter.

Adam Sieminski at Deutsche Bank AG, New York, warned that the recent earthquake that shut down the Kashiwasaki-Kariwa nuclear power plant in Japan will soon tighten world energy supplies by increasing demand for competitive fuels in an already stretched market.

The Kashiwasaki-Kariwa plant could be closed for a year, and other Japanese nuclear plants potentially may come down for safety inspections. Sieminski noted that in 2003, the Tokyo Electric Power Co., which operates the Kashiwasaki-Kariwa plant, had to close all 17 of its nuclear reactors for inspection and maintenance. “This consequently led to increases in Japan’s fuel oil and LNG imports because the marginal swing power supply capacity in Japan is mainly fossil fuel-based owing to their higher variable running costs,” said Sieminski.

(Online July 30, 2007; author’s e-mail: [email protected])