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Oil prices rise during week as US dollar falls against euro after Fed comments

Published: 00:20 03 Oct 2010 AEST

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Oil prices hit seven week highs on Friday after rallying on positive macroeconomic updates, falling inventories and a decline in the US dollar.

Equity markets surged on Friday after the final reading of the University of Michigan consumer sentiment index for September showed a revision to 68.2 from the first reading of 68.8, while a survey conducted by Bloomberg News projected a drop to 67.

A steeper decline in the index was likely after the Conference Board said that its index measuring US consumer confidence dropped from 53.2 to 48.5 in September on Tuesday, pushing the FTSE 100 down 1%.

Earlier in Friday’s session China reported that its PMI (purchasing managers index) rose from 51.7 to 53.8 in September. This came after HSBC’s (LON:HSBA) measure of China PMI showed an increase from 51.9 to 52.9 in September, marking a second straight monthly industrial expansion.

On Thursday, a report from the US Labor Department showed that initial claims decreased by 16,000, falling to 453,000, while continuing claims declined 293,000 to 4.88 million.

US GDP data provided more support for the markets, revealing an upward revision in the Q2 growth estimate from 1.6% to 1.7%.

The data triggered a rally in equity markets on both sides of the Atlantic, also boosting oil prices.

Crude usually follows movements in share prices, which serve as an indicator of the strength of the economy and energy demand.

Oil futures have not been following this trend over the past few weeks due to the continued pressure from build-ups in US crude and oil products inventories, which have recently reached all-time high levels.

This week, however, the US Energy Department said that inventories declined by 500,000 barrels, just a day after the American Petroleum Institute (API) reported a drop of 2.4 million barrels, reflecting a higher level of demand from the world’s largest energy consumer.

Movements in currency markets have also been favourable for the prices.

The US dollar has been in decline since last week, when the Federal Reserve stated that more quantitative easing was an option as the ongoing economic recovery was progressing at a slower pace than expected.

This Friday, President of the New York Federal Reserve William Dudley endorsed additional monetary stimulus, stating that the current unemployment levels of almost 10% and low inflation could lead to an outright deflation.

Dudley’s counterpart from the Chicago Fed Charles Evans also voiced support for more quantitative easing, stating that some of the forward moment has been lost in the recent months.

According to Evans, “it would be desirable to increase monetary policy accommodation to boost aggregate demand” in the wake of low inflation coupled with the unemployment rate.

Any indication of further monetary stimulus that is now very likely weakens the US dollar, while positive economic data dents its safe haven appeal, leaving it without much of a chance to rebound any time soon.

A weaker American currency makes dollar-denominated commodities such as crude cheaper for holders of other currencies, boosting demand and lifting the prices.

November Brent Crude last traded at US$83.81/barrel, while US light, sweet crude for November delivery reached US$81.58/barrel.

BP (LON:BP) rallied from 404 pence to 440 pence. Fellow supermajor Shell (LON:RDSB) advanced from 1,845 pence to 1,887 pence.

Cairn Energy (LON:CNE) and BG Group (LON:BG) held steady at 457 pence and 1,170 pence respectively, while another FTSE 100 constituent Tullow Oil (LON:TLW) climbed from 1,299 pence to 1,308 pence.

Oil and gas engineering firms moved in different directions. Amec (LON:AMEC) rose from 993 pence to 1,010 pence, while Petrofac (LON:PFC) declined from 1,411 pence to 1,392 pence.

Small Cap News

Leni Gas & Oil (LON:LGO) believes that artificial stimulation will maximise total recoverable reserves on its Spanish acreage. Consequently it will pilot nitrogen enhanced oil recovery (EOR) on the Ayoluengo reservoirs. The company has agreed a deal with US engineering specialist Praxair (NYSE:PX) for the project. This week, the company told investors that oil flowed to the surface during drilling of the Hontomin-2 well in Northern Spain. The well encountered oil at a depth of 1,350 metres. Shares in the company soared nearly 30% on the news. "This is an extremely important development for the company ... oil flowing to surface is an encouraging sign for this well," chairman David Lenigas commented.

Ascent Resources (LON:AST) announced that its managing director Jeremy Eng has purchased nearly 0.7 million shares, taking his stake in the company to 1.07%. The purchase price of 4.38 pence represents a premium of 9.5% to the stock’s closing price yesterday of 4 pence. The company has also reported a maiden interim profit, driven by continued gas production in Hungary and the disposal of its Swiss assets. For the six months period Ascent made a £448,321 profit (H109: £558,000 loss).

In addition to that, Ascent has completed the sale of its non-core Swiss assets, securing more cash and wrapping up what is perceived as a win-win deal by broker and investors. The disposal was completed after Ascent satisfied the commercial conditions required for the receipt of the €3 million in additional cash after receiving the initial cash consideration of €5 million at the time of the sale.

Aurelian Oil & Gas (LON:AUL) has found a 100 metre gas column in its key Trzek-2 well at the Siekierki Gas Project. The company encountered the gas in the top reservoir within the vertical section of Trzek-2.

Regal Petroleum (LON:RPT) achieved substantial financial and operating progress in H1 with revenues and production rates soaring.  Further improvements are expected as more wells come on stream and issues that are holding back production rates are being resolved.

Mediterranean Oil & Gas (LON:MOG) said it expects to “achieve clarity” on a recent regulatory clampdown by the Italian authorities that could block the development of the Ombrina Mare field in the Adriatic.

Dominion Petroleum (LON:DPL) has had a busy first half, achieving operational progress across its projects and raising enough capital to enable the next phase of exploration activity.

Petro Matad (LON:MATD) chairman Douglas McGay highlighted the company’s exciting period of achievement in the first six months of the year. The first Davsan Tolgoi well provided a trigger for a substantial increase to investor interest and its share valuation after it discovered oil in July.

David Bramhill, the founder and managing director of Nighthawk Energy (LON:HAWK, OTCQX: NHEGY), has announced his intention to retire from the board with immediate effect. He will be succeeded as boss by commercial director Tim Heeley.

Northern Petroleum (LON:NOP) reported a substantial increase in interim revenues due to new gas production, expecting to further improve its financial performance in the near term. Revenues more than doubled from €2.8 million to €7 million, helping the company make a €2.3 million pre-tax profit after posting a loss of €0.5 million a year ago.

Also this week, Northern announced that it has begun commercial production from the Brakel field, the third of six onshore oil and gas fields in the Netherlands. Gross sales volumes are expected to be 200,000 cubic metres per day, the equivalent of 1,280 barrels of oil.

Caza Oil & Gas (AIM:CAZA; TSX:CAZ) shares jumped around 30% after initial tests on a new well indicated "multiple potential pay sands". The joint ventured Caza 158 well was drilled on the Windham Wolfberry prospect. After this initial success the partners are now drilling the next well in the programme, the Caza 162 well, which will test the western portion of the prospect.

Europa Oil & Gas (LON:EOG) expects to report full-year oil production revenues of 3.1 million. The company said this would be broadly in line with analyst expectations. However Europa said that exceptional items will cause pretax profits to be lower than anticipated.

Xcite Energy (LON:XEL,TSX-V: XEL) said that drilling operations have begun on the  9/3b-R pilot well on the Bentley field in the UK North Sea.

The next well to be drilled in the Falklands could be worth more than 520p per share to Desire Petroleum (LON:DES), according to Evolution Securities analyst David Farrell. This week, Desire spudded the Rachel exploration well in North Falklands basin, in a similar setting to Rockhopper Petroleum’s (LON:RKH) Sea Lion discovery.

Meanwhile, Desire Petroleum (LON:DES) is preparing to carry out further investigation of its acreage in the Falklands, raising £22.8 million to fund a 3D seismic acquisition campaign. The company announced last week that is was placing 16.3 million new shares to raise £22.8 million.

Falkland Oil and Gas (LON:FOGL) plummeted on London’s AIM market after it reported setbacks for its interests in both the Northern and the Southern license areas. It will miss the drilling deadline in the northern license and it must go it alone in the southern license after its major partner BHP Billiton (LON:BLT, ASX:BHP) pulled out.

Nautical Petroleum (LON:NPE) has entered into a farm-in agreement with Providence Resources (LON:PVR) to buy an up to 65% interest in the Standard Exploration License 2/07.

Xcite Energy (LON:XEL,TSX-V: XEL) has secured up to £20 million in new capital, with a deal for an equity line facility. The company has entered a Standby Equity Distribution Agreement (SEDA) with an investment fund managed by Yorkville Advisors, the YA Global Master SPV Ltd.

Large and Mid Cap News

British Gas parent company Centrica PLC (LON:CNA) said the British Gas Business division has acquired the assets of the gas and electricity services businesses of Connaught Compliance, the trading division of distressed social-housing contractor Connaught Group PLC (LON:CNT), for £11.2 million in cash.

Australian Strategic Materials signs US$600 million LoI

Rowena Smith, CEO and managing director of Australian Strategic Materials Ltd (ASX:ASM, OTC:ASMMF), joins Jonathan Jackson in the Proactive studio to discuss the company’ s Dubbo Project, in Central West New South Wales. This project aims to extract and process critical minerals and rare earth...

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