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Oil futures end week with gains despite US demand concerns, China rate move

Published: 15:21 23 Oct 2010 BST

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Despite a late decline, oil futures ended the week with gains.

Crude oil prices were on the rise at the start of the week, driven by concerns over the ongoing strike in France that had caused massive fuel supply disruptions as well as expectations of further quantitative easing (QE) from the US Federal Reserve.

An update on US industrial production that was released on Monday showed a decline of 0.2% in September, which was interpreted as another sign that more QE is inevitable.

However, traders were mindful of Fed Chairman Ben Bernanke’s recent comments that suggested that while the Fed was inclined to resort to more stimulus to drive up inflation and spur the slowing recovery, it appeared to be undecided on what the timing and the scale of the next round of QE should be.

The US government’s lack of a resolution to introduce more QE has provided a relief for the US dollar that hit multi-month lows against a basket of other major currencies last week.

The surge in greenback has pushed down oil prices, making the dollar denominated crude more expensive for holders of other currencies, denting demand.

Oil was hit hard by China’s unexpected decision to hike interest rates by 0.25%, which was announced on Wednesday, marking the government’s latest attempt to curb inflation that is firmly on track to eclipse the 3% target for the full year.

Higher interest rates are expected to curb economic activity, pushing down the demand for crude oil from the world’s second largest energy consumer.

On top of that, the prices have been pressured by this week’s US inventories reports, which signalled a lower level of demand from the world’s largest energy consumer.

The US Energy Department said that gasoline stockpiles unexpectedly gained 1.3 million barrels last week, while crude oil inventories in the added 700,000 barrels.

Volumes were very low on Friday as investors opted to stay on the sidelines amid caution over the G20 meeting that kicked off in South Korea.

The group focused on fiscal policy issues, looking to work out an agreement to precluse a currency war that could cause countries to resort to protectionist measures.

As was expected, the US proposal to set targets for current account imbalances at 4% of the gross domestic product (GDP) was not adopted. Instead, the G20 financie ministers issued a joint statement, pledging pledging to refrain from devaluing their currencies and move to “more market determined exchange rate systems” as well as reduce excessive imbalances in their current accounts.

December Brent Crude ended the week at US$82.95/barrel. Brent for January delivery improved to US$83.50/barrel.

US light, sweet crude for December delivery, which is currently the most actively traded contract on the New York Mercantile Exchange (NYMEX), reached US$81.87/barrel, while the January contract last traded at US$82.65/barrel.

Supermajors moved up with Shell (LON:RDSB) climbing from 1,926 pence to 1,953 pence, while BP (LON:BP) rose slightly from 425 pence to 428 pence. BG Group (LON:BG) also did well, improving from 1,167 pence to 1,203 pence.

However, Tullow Oil (LON:TLW) declined from 1,255 pence to 1,236 pence and Cairn Energy (LON:CNE) dropped from 429 pence to 417 pence.

Oil and gas engineering firms rose. Amec (LON:AMEC) moved higher from 1,038 pence to 1,047 pence and Petrofac (LON:PFC) climbed from 1,455 pence to 1,470 pence.

Small Cap News

Edison Investment

Research expects the upcoming reserves review at Gulfsands Petroleum (LON:GPX) to produce an upgrade after management confirmed better than expected well performance. Meanwhile, Astaire Securities justified Gulfsands' “fairly high” valuation, saying the escalating production profile bodes well as do the economics in Syria which it called particularly robust.

Falkland Islands oil explorer Argos Resources (LON:ARG) has signed a contract for marine seismic acquisition services with Polarcus. It will carry out a “substantial” 3D seismic survey covering all of the Argos’ acreage in licence PL001, as well as adjacent areas.

Mongolia-focused oil group Petro Matad (LON:MATD) may be able to extend the 2010 work programme, according to Westhouse Securities analyst David Hart. This week, Petro Matad said its Davsan Tolgoi (DT)-3 well in Mongolia reached 345 metres on Sunday, just two days after its spud date. The depth marks the first casing point, where the first strong casing will be set and cemented. Following that, the well will continue drilling the second and final string to its target depth of 1,200 metres.

Xcite Energy (LON:XEL,TSX-V:XEL) is currently trading on a discount and its valuation will rise significantly if the critical 9/3b-6 appraisal well proves successful, according to research by Edison Investment Research analyst Ian McLelland.

Astaire Securities said it was encouraged by the course that Baobab Resources’ (LON:BAO) 2010 drilling programme was taking as it has provided robust results on which to base the 2011 campaign.

Victoria Oil & Gas (AIM:VOG) this week gave an encouraging update on its Logbaba gas project in Cameroon, revealing that proved reserves have increased almost five-fold to 49 billion cubic feet.

Regal Petroleum (LON:RPT) has put its drilling operations on hold whilst it completes an ongoing strategic review. The company has now completed its work-over on the SV-61 well, and the SV-69 well has been prepared for a future sidetrack to overcome technical problems.

Nighthawk Energy’s (LON:HAWK) annual results statement revealed the company’s revenues rose 332 per cent to US$2.1 million.

Aurelian Oil & Gas (LON:AUL) said the Trzek-2 well has a larger gas column with better porosity, improved gas concentration and better permeability than the other wells at the Siekierki field. Trzek-2 is the first multi fracced horizontal well to be drilled in Poland.

Rockhopper Exploration (LON:RKH) has raised £206.3 million to carry out significant appraisal and exploration work in the North Falklands basin. Earlier this year the company made the first oil discovery in the frontier exploration play.

Cove Energy (LON:COV) shares were up almost 7% after its joint venture

partner Anadarko Petroleum (NYSE:APC) reported a significant natural gas discovery in Mozambique.

EnCore Oil (LON:EO) believes the Cladhan oil discovery in the North Sea could hold more than 250 million barrels of oil. EnCore has a 16.6% stake in the Cladhan joint venture, and operator Sterling Resources (TSX-V:SLG) has received an independent resource evaluation from RPS Energy.

IGas Energy (LON:IGAS) has managed to increase average gas production at its Doe Green site near Warrington in Cheshire by about 40%. The news, coupled with an unrisked gas initially in place (GIIP) estimate for its Holywell shale, was well received by investors as shares in IGas rose 5%.

Europa Oil & Gas (LON:EOG) announced the spud of the Barchiz-1 exploration well in Romania. The well, situated in the EPI-3 Brates concession, in which Europa has a 20 percent interest, is scheduled to take approximately 30 days to drill to an estimated final total depth of 1,400 metres.

Large and Mid Cap News

Shares in Tullow Oil (LON:TLW) were down 3% after the oil and gas major's Onyina-1 exploration well in the Deepwater Tano licence offshore Ghana encountered water bearing reservoirs, which broker finnCap called a “major disappointment”.

Dragon Oil (LON:DGO) said production rose in Q3 and remains on track for a full year increase, while outlining the steps it will take to further boost output in the near term. The FTSE 250 oil and gas company produced 46,400 barrels of oil per day on average in the quarter to 30 September, up from 46,060 barrels a year earlier.

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