Morning Petrospective – September 23, 2011

e were wondering for the last few months why oil prices remained steady when we had such bearish news. This happened in terms of supply and demand, in terms of the dollar, in terms of economic data, the end of QE2, the return of Libyan oil, and the series of Euro-zone travails. Oil prices remained stubbornly resilient throughout a number of bearish events or developments. Over the last couple of days that has evaporated. Curiously, there were signs that this might be starting two weeks ago.

Between September 6^th and 20^th, the number of outstanding crude oil contracts on the Nymex dropped 158,710 (contracts). Some of this was clearly based on the expiration of the October contract. But, quite a bit of it seems to have come from a fundamental, tectonic reappraisal of the market’s prospects by large investors and funds. They had been getting out of the crude oil market for two weeks before it really started to drop steeply, but it was a sign that the resilience was gone.

We believe that large numbers of well-heeled investors have decided that QE3 was either not coming or that it would not be adequate to the task at hand. Operation Twist is a kind of quantitative easing; it just is not quite QE3. It has taken months for large enough groups of investors to come to the conclusion the market is telling us they have. We assume that they have thought it out past the first phase, which would be going on now. Everyone is asking and wondering if the reaction by markets over the last two days would not force the Fed to embrace a full-blooded QE3. We can’t say that it will, but the investors getting out of assets surely will have thought this out beyond this first reaction. That is why we added the part about QE3 potentially not being adequate for the task.

It is not as if the Fed has never issued a downbeat review of the economy before. Most wire service reviews of Thursday’s activity included two comments. The first suggested that the market wanted more from the Fed – a full-blooded QE3. The other suggested that the Fed shot itself in the foot by sharing its concerns for an economy that everyone knows is hurt. We don’t know that the Fed’s comments made things worse, but they certainly did not make them better.

The NFL has a way of categorizing its wounded. There are four categories: probable, questionable, doubtful and out. All the Fed really did was to tell us that the economic recovery is somewhere between questionable and doubtful. We would be surprised to hear it tell us that the recovery is out. And no one would believe them telling us one is probable, here. The Fed acknowledged it will take years to get back to where we once were. Few really wanted to hear that.

The DJIA was down 391.01 to 10,733.83 on Thursday. It found its low right in line with its low six weeks ago or so. If it breaks and finished below it, we should expect another leg lower in equities. The US dollar was higher in the early morning, but it gave back most of the gains after 9 AM.

FMX Newswire

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Bentek Energy

• Power Burn Analytic Report – Power Burn Down 0.8 Bcf/d As Cooling Load Continues to Taper.
• Midcon Observer – ANR Maintenance Shuffles Alliance Receipts; Imports on Alliance Stay Flat.
• Supply/Demand Balance Analytic Report – US Demand Expected to Slide Back Below 50.0 Bcf/d in Coming Week.
• Nuclear Plant Status Analytic Report – Little Outage Activity Planned Throughout the End of September.

Platts

• How do you solve a problem like China? The US renewables industry faces that issue. 
• Shale gas a key driver in the burgeoning US petrochemicals 'renaissance'. 
• Italy's oilfield engineering group Saipem inks joint venture with Russian shipbuilder OCK. 
• EU ban does not affect existing investment in Syria's oil sector.  

Bloomberg

• Crude Oil Futures Fall to Lowest Price in More Than Six Weeks in New York.
• Lee Sees Russia Gas Pipeline Via North Korea as Win-Win for Cheaper Energy.
• Reliance Said to Need Up to Four Years to Increase Output at Largest Field.
• Gas Drillers Face ‘Chaos’ in Land Law Ruling.

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