Oil prices hit two year highs this week after the Federal Reserve announced a fresh US$600 billion round of quantitative easing, raising expectations of a higher level of economic activity and an increase in energy demand.
Futures for crude oil got a boost early in the week when the US dollar got hit by Australia’s decision to hike its interest rates from 4.5% to 4.75%, prompting investors to ditch the US dollar in favour of riskier currencies such as the euro.
As a result, the dollar-denominated crude became cheaper for holders of other currencies, leading to an increase in demand.
The Reserve Bank of Australia added fuel to the fire when it commented that concerns over the slowing in Chinese growth have lessened, giving yet more support to oil and raw materials as China is the world’s second largest energy consumer and the main customer for the main base metals.
After the Fed announced a further US$600 billion in Treasuries purchases through June 2011, oil futures rallied with the US benchmark crude reaching two year highs.
Should the Fed succeed in its attempt to speed up the ongoing recovery, energy demand would likely grow, pushing up crude oil prices. The move will also keep the pressure on the US dollar.
The US dollar index, measuring the greenback’s strength against a basket of other currencies, slid to multi-month lows after the Fed’s new stimulus package was unveiled.
The Fed was widely expected to announce a new round of quantitative easing, though it was not clear what the size of the new asset purchase programme was going to be. The consensus forecast seemed to be US$500 billion over six months.
Investors shied away from putting money into riskier assets, held back by a report in the Wall Street Journal, which suggested that the Fed may opt for a smaller package, limiting it to a few hundred billion over a few months to minimize policy risks.
Yet the Fed went for a larger stimulus round, boosting the demand for crude oil and metals.
At the beginning of the week, Saudi Arabia’s oil minister said the country was comfortable with the prospect of oil prices climbing to US$90/barrel. Saudi Arabia has previously stated that its desired price range was US$70-80/barrel.
Analysts at JP Morgan (NYSE:JPM) suggested that Saudi Arabia could lift the upper limit of its “comfortable zone” even further.
This week’s inventories report from the US Energy Administration showed a gain of 2 million barrels in crude oil stockpiles, while gasoline inventories shed 2.7 million barrels.
Meanwhile, the International Energy Agency (IEA) expects oil prices to inflate in the event that the G20 countries don’t make good on their promise to cut fossil fuel subsidies, which would reduce oil demand by 10% by 2035.
This was reported by the Financial Times, which obtained a copy of the IEA’s World Energy Outlook Report, which will be officially released next Tuesday.
The IEA estimates that such a decline would push down the average oil price from inflation adjusted US$135/barrel to US$113/barrel by 2035.
US light, sweet crude for December delivery reached US$87.40/barrel, while January crude last traded at US$87.50/barrel on the New York Mercantile Exchange (NYMEX).
On the ICE Exchange, December Brent Crude rose to US$88.47/barrel. Brent for January delivery climbed to US$88.71/barrel.
Supermajors did well this week. Shell (LON:RDSB) rose from 1,998 pence 2,044 pence and BP (LON:BP) climbed from 425 pence to 446 pence.
Other blue chip oil and gas producers followed. BG Group (LON:BG) surged from 1,215 pence to 1,292 pence and Tullow Oil (LON:TLW) advanced from 1,185 pence to 1,251 pence.
Cairn Energy (LON:CNE) held steady at 385 pence.
Oil and gas engineering companies also were in demand. Amec (LON:AMEC) improved from 1,086 pence to 1,124 pence, while Petrofac (LON:PFC) rose from 1,463 pence to 1,532 pence.
Oil and gas sector news
Small Cap News
Leni Gas & Oil PLC (LON:LGO) announced it is in talks over a cooperation agreement for the exploitation of unconventional gas opportunities in Spain.
North Sea oilfield developer Xcite Energy (LON:XEL, TSX-V:XEL) said it has drawn down £7 million under its Standby Equity Distribution Agreement (SEDA) with YA Global Master SPV Ltd at £1.5385 per share, or C$2.50, which will result in the issue of 4.55 million ordinary shares . Xcite gave a generally upbeat assessment of its prospects this week as it unveiled third quarter results. The figures showed the company has cash balances of £27.8 million compared with £1.74 million a year ago, and the funds to pursue its plans for the Bentley heavy oil field, 100 miles east of Shetland.
ADX Energy (ASX:ADX) has had a significant resource boost to an inferred mean recoverable contingent resource of 234 bcf sales gas, and 50 million barrels of oil equivalent of condensate and LPGs, from the Dougga Gas Condensate discovery located offshore Tunisia. ADX is the operator with a 60% stake, with Gulfsands Petroleum (LON:GPX) 30% and XState Resources Ltd 10%.
Fox-Davies Capital (FD-Capital) believes the political risk attached to the Kurdistan Region in Iraq - where Gulf Keystone Petroleum (LON:GKP) operates - will disappear as soon as a new government is installed in Baghdad. The initial results from Gulf Keystone's first well in the Sheikh Adi license bode very well for the prospect, according to Fox-Davies Capital oil and gas expert Lionel Therond.
Cove Energy (LON:COV) is set to raise £110 million to help it pick up the pace of its Mozambique joint venture with US oil major Anadarko Petroleum (NYSE:APC).
Ascent Resources (LON:AST) said it has completed the sale of a 20.2 per cent stake in the Nyírség Szatmár permits in Hungary, which contains the Görbeháza-1 gas discovery. This week, Ascent appointed Scott Richardson Brown as a non-executive director with immediate effect. He will take over as finance director on January 4 2011, replacing Simon Cunningham who is relocating to Australia.
Shares in San Leon Energy (LON:SLE) rallied 12.7% after expanding its concession for oil and gas reconnaissance and exploration in what it said was a very sought after shale gas area.
The oil and gas exploration firm Petroceltic (LON:PCI) has underlined its desire to grow the business by appointing one of the sector’s leading dealmakers as corporate development director. He is Tom Hickey, who was previously chief financial officer of Tullow Oil (LON:TLW).
The closely followed drilling campaign in the Falklands has suffered another setback after Desire Petroleum (LON:DES) said it would plug and abandon the 14/15-1Z sidetrack well on the Rachel prospect. Desire Petroleum shares defied the apparent failure in the latest Falklands exploration well, with a 15 percent gain.
Europa Oil & Gas (LON:EOG) reported a positive initial result from the Barchiz-1 exploration well in Romania. The company encountered minor oil shows and mud gas indications between 268 and 275 metres.
Large and Mid Cap News
Royal Dutch Shell (LON:RDSB) has agreed to sell its interest in six Gulf of Mexico oil and gas fields for US$450 million as part of its portfolio restructuring campaign.