Oil prices declined late in the week after equity markets slipped on the disappointing job update released by the US Labor Department. The report showed that non-farm payrolls declined by 131,000, while analysts expected a loss of 60,000 to 70,000. June’s 125,000 decline in payrolls was revised upwards to 221,000, raising yet more concerns about the strength of the ongoing ecnomic recovery in the US and the outlook for energy demand. The private sector added 71,000 jobs compared to 31,000 in June.
The negative impact from the steeper than expected job losses was partially mitigated by the update on the unemployment rate, which stayed unchanged at 9.5%.
Despite falling well below US$81/barrel just a couple of days after nearly reaching the US$83/barrel level, crude still managed to post weekly gains as investors remained optimistic about the outlook for global economy despite the disappointing employment report.
Oil prices surged at the start of the week after the HSBC China Manufacturing PMI (purchasing managers index) released over the weekend showed a decline from 50.4 in June to 49.4 in July, reflecting a slowdown in manufacturing activity in the country. The markets cheered the news, hoping this would prompt the government to halt the policy tightening measures it has been actively implementing this year to prevent the rapidly growing economy from overheating. China’s Shanghai Composite Index added more than 1% on the news.
Other economic data released this week included an upward revision of the Markit/CIPS index for July from 54.4 to 53.1, and an update on the PMI for the 16 euro zone countries, which climbed from 55.5 in June to 55.8 in July, which, however fell short of a preliminary estimate of 56.0. The ISM (Institute of Supply Management) later reported that its US non-manufacturing index improved from 53.8% in June to 54.3% in July, signaling an expansion of the service sector
This week’s inventories data offered mixed signals about the strength of oil demand in the world’s largest energy consumer. Wednesday’s closely watched inventories report from Energy Information Administration (EIA) showed a decline of 2.8 million barrels in US crude stockpiles last week. However, gasoline inventories added 729,000 barrels and distillates, which include diesel and heating oil, increased by 2.2 million barrels. Total inventories of crude oil and oil products now stands at the highest level since 1990 at 1.125 billion barrels.
On Tuesday, inventories report from the American Petroleum Institute (API) showed that US crude stockpiles shed 776,000 barrels last week, which was a smaller decline than expected.
The results from major banks have been positive with part-nationalized Lloyds (LON:LLOY) and Royal Bank of Scotland (LON:RBS) returning to profits, while Barclays (LON:BARC) said its interim profits jumped more than twofold to £7 billion.
The bearish employment data started coming out on Thursday, when the Labor Department said that initial jobless claims increased by 19,000 last week, rising to 479,000. Continuing claims declined by 34,000 to 4,537,000, which, however, was not enough to keep the markets in the black.
Oil got more support from concerns over the upcoming hurricane season in the Gulf of Mexico, which could disrupt production in the region and curb supplies. Additionally, crude benefitted from this week’s movements in currency markets with the euro gaining against the US dollar. The greenback got hit by Friday’s jobs update, which put the EUR/USD rate to 1.3281. A weaker US dollar makes the dollar-denominated crude cheaper for holders of other currencies, leading to a higher demand.
September Brent Crude slid to US$80.36, while US light, sweet crude for September delivery retreated to US$80.70/barrel late on Friday.
Blue chip oil and gas stocks were mixed. BP (LON:BP) rose from 405 pence to 425 pence and fellow supermajor Shell (LON:RDSB) rallied from 1,679 pence to 1,728 pence, while BG Group (LON:BG) declined from 1,023 pence to 1,005 pence and Cairn Energy (LON:CNE) slid from 466 pence to 460 pence. Another FTSE 100 constituent, Tullow Oil (LON:TLW), advanced from 1,231 pence to 1,263 pence.
Oil and gas engineering firms were in demand this week. Amec (LON:AMEC) advanced from 875 pence to 909 pence and Petrofac (LON:PFC) climbed from 1,252 pence to 1,302 pence.
Small Cap News
Range Resources Ltd (ASX:RRS; LON:RRL) reported on the progress made in the fourth quarter to end-June2010 and subsequently, noting that its joint venture partner in Somalia’s Puntland province, Africa Oil Corp, announced the farm-out of a 10 percent interest in the JV to ASX listed entity, Red Emperor Resources (ASX:AMP) during the period.
Serica Energy (TSX-V:SQZ, LON:SQZ) said that that on July 30, drilling operations commenced at the Oates exploration well location in Block 22/19c in the UK Central North Sea.
Edison Investment Research said there was plenty of upside to the value of Leni Gas & Oil (LON:LGO) as the current market price implied a price of just US$0.5/boe (barrel of oil equivalent), while Edison said that US$2/boe would be more appropriate, noting its 10% exposure to highly prospective exploration acreage in Malta and high reliability of its projects.
Kurdistan focused oil and gas producer Gulf Keystone Petroleum (LON:GKP) has commenced the drilling of Sheikh Adi-1, the first exploration well on the Sheikh Adi block immediately to the West of the Shaikan block, where a giant oil field was discovered last year.
Following the latest testing on the Shaikan-1 well, Gulf Keystone Petroleum (LON:GKP) said it has now demonstrated aggregate capacity of more than 20,000bopd (barrels of oil per day) “from just a fraction” of the Shaikan discovery in Kurdistan.
Leni Gas & Oil (LON:LGO) expects to spud a well on the Hontomin oil discovery in northern Spain later this month. The rig is scheduled to arrive on or around the 16 August. The well is intended to appraise the long term production potential of the Hontomin-2 well.
PetroLatina (LON:PELE) is set to raise US$5m with a placing of 8.1m shares for up to 40p each, to Macquarie Bank - an existing shareholder and a lender to the company. The company said that the proceeds will be used to finance the group's ongoing work programme and fund exploration activities in Colombia.
Large and Mid Cap News
Talisman Energy Inc (TSX:TLM, NYSE:TLM) and Ecopetrol SA have agreed to acquire BP (LON:BP) subsidiary BP Exploration Co (Colombia) Lt for US$1.9 billion in cash.
The US government has announced that three quarters of the oil that has leaked out of BP's (LON:BP) Deepwater Horizon well into the Gulf of Mexico has been cleaned up or broken down by natural forces, the Telegraph reported in its online edition.