Myra P. Saefong and Williams Watts, MarketWatch

SAN FRANCISCO/NEW YORK
EnergiesNet.com 09 09 2022

Oil futures settled higher on Friday, with supply worries and a pullback in the U.S. dollar contributing to a bounce off seven-month lows, but prices still posted a weekly loss.

Price action

• West Texas Intermediate crude for October delivery CL.1, 0.67% CL00, 0.68% CLV22, 0.68% rose $3.25, or 3.9%, to settle at $86.79 a barrel on the New York Mercantile, trimming its weekly decline to nearly 0.1%, according to Dow Jones Market Data.
  
  
• November Brent crude BRN00, 0.85% BRNX22, 0.85%, the global benchmark, added $3.69, or 4.1%, at $92.84 a barrel on ICE Futures Europe, for a weekly fall of 0.2%.
  
  
• On Nymex, October gasoline RBV22, 0.57% rose 3.7% to $2.4331 a gallon, ending the week down 1.2%.
  
  
• October heating oil HOV22, 1.41% added 1.1% to $3.5787 a gallon, little changed for the week.
  
  
• October natural gas NGV22, 1.11% rose 1% at $7.996 per million British thermal units on Friday, but posted a weekly loss of 9%.

Market drivers

Crude-oil prices extended Thursday’s bounce off of levels last seen in January, with analysts tying the rise in part to a fall in the U.S. dollar index DXY, -0.69% of 0.6% in Friday dealings after reaching a 20-year high.

The dollar’s surge had been seen as a factor in oil’s tumble as a rising greenback makes commodities priced in the unit more expensive to users of other currencies.

“The formation of a couple of tropical storms in the Atlantic might be providing a minor boost” for oil and, after the European Central Bank’s interest-rate increase, “people who had sold off in anticipation are now buying in,” said Michael Lynch, president of Strategic Energy & Economic Research.

However, “longer term, economic news seems likely to keep pressure on prices,” he told MarketWatch.

The prospect of losing Russian oil and gas from the market may also be providing some support, with Moscow threatening to walk away from contracts if a plan by Group of Seven nations to impose price caps is implemented.

Still, as Benjamin Salisbury, director of research at Height Capital Markets, pointed out in a note Friday, “essentially, by reducing the bidders for high-price Russian oil, the cap would empower remaining buyers.”

Meanwhile, soaring natural-gas prices in Europe are already seen providing an incentive for switching to producing electricity from oil fired plants.

TTF, the Dutch gas pricing point, traded at nearly 210 euros per megawatt hour, or MWh, which is comparable to crude oil at $360 a barrel, said Michael Tran, analyst at RBC Capital Markets, in a note.

Read: EU nations seek joint approach to contain energy price

“Current astronomical levels are nearly 15x higher than normal gas prices. This could lead to an incremental unlock of some 300,000 barrels a day of oil demand, but quantifying the bump is challenging given the lack of transparency around the configuration of diesel-fired generators and industrial boilers,” Tran wrote.

He found that between 2015 and 2020, Brent crude and TTF prices saw a large, positive correlation of 0.63. For the year to date, that correlation has fallen to 0.13, and since June, the two have had a negative correlation of 0.90. Put simply, the oil market is not being rewarded for the economics of switching. Why? The higher natgas prices go, the increased odds of a European recession, and the contagion could have a wider negative impact than the small bump in oil demand.

Expectations for a boost to crude demand, however, must be tempered by concerns about the outlook for the European economy, which is widely expected to tip into recession due to the energy price shock this year.

marketwatch.com 09 09 2022