30.06.2010

Energy Daily Report

Oil prices fell sharply on Tuesday, and other commodity and equity complexes got hammered as well, with the Reuters-Jefferies CRB Index falling to a two-week low. The stronger dollar was instrumental in triggering some of the selling, as it rallied to $1.2170 against the Euro, its highest level since mid-June. The greenback was responding to jitters emanating from Europe, this time having to do with investor unease about the fact that the ECB is calling in about €442bn in one-year loans it made to a number of banks, all of it due on Wednesday. Banks could now roll over their debt in three-month installments as opposed to the one-year tranche, so we should know later in the day how many institutions will be lining up for three-month money, how many will pay the debt off, and how many of the weaker banks opt to borrow from each other. For its part, the ECB wants to wean banks off its long-term funding program and is concerned that providing 12-month loans would distort the markets. Having said that, it can ill-afford to throw the repayment exercise off kilter, and senior ECB officials are aware of that, which is why they are expressing confidence that Wednesday's funding requirements would be met.

Another bearish variable weighing on the markets is the fear of slowing growth prospects, both in China and in the US. In China's case, local equity markets were pummeled on Tuesday after a US-based Conference Board economic index showed April activity rising by ,3%, its smallest increase in some five months. The rise was revised from a 1.7% gain initially reported earlier, and although the Conference Board attributed much of the revision to an error made in the previous month's calculation, this was of little comfort to the Chinese equity markets, which slumped 4% on the day. Here in the US, we had reports showing consumer confidence dropping by almost 10 points in June to 52.9, down from the revised 62.7 in May. Economists had been expecting the reading to dip to 62.8, but instead, the markets got stunned by the biggest decline in confidence readings since February.

In Gulf news, Alex was forecast to make landfall near the Texas-Mexico border late Wednesday or early Thursday, the NHC said. While the storm's path was not expected to hit production lanes, some oil companies have taken precautionary measures by evacuating nonessential personnel and shutting down limited amounts of production. Although the storm system is not anywhere close to the spill cite, the surf it is generating has caused BP to shelve plans for hooking up a third containment system to capture more oil. On shore, officials in Florida said the high surf will likely hamper clean-up efforts as well.

In after hours trading, energy prices have ticked lower as of this writing despite the API report showing that crude oil stocks fell by 3.4 million barrels last week, well ahead of the 900,000 barrels forecast. There was a larger-than-expected fall in gasoline stocks as well (down by 900,000 barrels), but distillates more than made up for it, rising by 4 million barrels on the week, substantially more than the 800,000 barrels expected.

Looking ahead, we could be on the cusp of another sharp break lower in many markets, as the European funding issue, if not properly handled, has the capacity to become another potential crisis that could hit the Euro. Should US macro numbers out this week also come in on the wobbly side, the selling could intensify, particularly since the technicals in a number of complexes do not look that good either. In energy's case, our charts show that although the two crude contracts seem to be holding up, the short-term uptrend trendline for both gasoline and heating oil (illustrated in Monday's note) have broken down. More unnerving, is the chart pattern for the S&P 500 (see below) where prices are on the verge of breaking below support that has held between 1030-1050 for the past nine months. Upcoming action in the US equity markets and the European loan repayment schedule out later in the day will therefore be the driving forces dictating price direction in a number of markets going into Wednesday's session. Whatever happens, we expect even greater volatility in the days ahead.

In Other News .....

* Tropical Storm Alex has shut 24.7% of oil production and 9.4% of natural gas output in the Gulf of Mexico, the US Bureau of Ocean Energy Management, Regulation and Enforcement said Tuesday

* US oil demand in April was 18.910 mbpd, 45,000 bpd higher than earlier EIA estimates predicted, and 439,000 bpd higher than year-ago levels, EIA data showed.

* US weekly retail gasoline demand rose 2% in the week ending June 25, even as gasoline prices rose slightly, this according to the SpendingPulse report that came out Tuesday.

* Oil prices could slump to $60 per barrel or less over the next three years, and this could stifle Russia’s chances to regain control of its budget deficit, so said Russia’s Finance Minister in a Reuters interview. Russia has plans to gradually reduce its budget deficit to zero by 2015, but this is largely dependent on an oil price of around $75 per barrel.

* OPEC crude oil supply will likely decrease in June following a 17-month high due to lower supplies from Iraq, Angola and Nigeria, a Reuters survey showed. Crude supply from the OPEC-11 in June averaged 26.75 mbpd, down from 26.90 mbpd in May. Current OPEC member compliance with output targets showed a slight increase this month, to 55% from 51% in May.

* Mexico's energy ministry disputed a media report published by India's Economic Times that said Pemex was going to build a new oil refinery with Reliance Industries. "The information is false, Pemex is only planning to construct a refinery in Tula, Hidalgo, as all Mexicans know," the energy ministry statement said.

* A fire at Total's Lindsey oil refinery in England caused injuries to two people and the shutdown of a crude distillation unit on Tuesday, the company said. Rail transports of oil products were suspended temporarily while the fire was extinguished, but shipments from the 223,000 bpd operation resumed that afternoon.

* Oral arguments will be heard on July 8th regarding the Obama administration’s request for a stay on a US Appellate Court ruling that lifted the moratorium on deepwater drilling in the Gulf of Mexico, according to government sources.

European North Sea crude oil quotes as reported by Reuters: There were no Forties deals reported in the afternoon trading window. A Forties cargo for July 13-16 bid at dated minus 10c. In Rotterdam, complex margins for Brent averaged $5.40 per barrel, compared with an average of $3.25 per barrel over the past year.

U.S. gasoline/distillate quotes as reported by Reuters: In Gulf Coast trading, M2 traded at 9.50 and 9.60c under. On distillates, ULSD was at 0.25 under, heating oil was at 6.00/5.00c under, and jet was at 1.75c under. In New York Harbor, ULSD was at 5.00c over, low sulfur was at 2.50c over, heating oil was at 1.75c under, and jet was at 1.75c over. M2 was at 7.75c under and F2 was at 0.40c over.

 

For more information, please contact Mr. Oleg Korolev

okorolev@schnigge.de

+492111386156