Oil breaks after French strike ends

French Press.

Oil prices got a boost from the beleaguered dollar but word that the Strikes in France may be winding down may have taken away some of the upside allure. Oil prices broke after Bloomberg News reported that Workers at Fos-sur-Mer and Port Jerome-Granvenchon, two Exxon Corp. refineries in France that have been on strike for 10 days, have voted to return to work, Jean-Michel Maton, a representative of the CFDT union, said by telephone. The French strikes have led to larger than expected U.S. exports of diesel as reports of tankers being destined for Europe have been making the rounds. Still the dollar seems to be the major factor for oil and the price break from France may be offset if the dollar renews its assault on the downside.

Still the big news overnight was some strong data out of the U.K. MarketWatch reported that the" British economy grew by 0.8% in the third quarter, easing from the previous quarter's pace but defying forecasts for a sharper slowdown and dampening expectations the Bank of England will soon implement a further round of monetary easing. The Office for National Statistics said third-quarter gross domestic product expanded by 0.8% compared to the second quarter. Compared to the third quarter of last year, GDP grew 2.8%. GDP had expanded at a 1.2% quarterly pace in the second quarter. Economists surveyed by Dow Jones Newswires had produced an average estimate of 0.4% quarterly growth and a 2.4% year-on-year rise. Year-on-year growth in the third quarter was the strongest since the third quarter of 2007."

This strong growth in the UK does change the landscape a bit. The dollar is up against the Euro as the European economic recovery extends past Germany. The data weakened the Euro which in turn strengthens the dollar which in turn has taken away some the upside momentum in oil. Natural gas spiked lower hitting a 13 month low on mild weather and an abundance of supply. Still some things there are signs that perhaps the bottom may be getting closer. Joe Silha at Reuters News reports that the fact that the US drilling rig count could be a sign that perhaps the sell off may be ending. The U.S. natural gas weekly drilling rig count slipped by one on Friday, its fourth fall in five weeks, according to Baker Hughes data on Friday, stirring expectations the declines could put a floor under gas prices. The overall number of rigs drilling for natural gas in the United States dropped this week to 965, said Baker Hughes, an oil services firm based in Houston. The number of horizontal rigs -- the type most often used to extract gas from shale and a component of the overall number -- slid 19 to 907, its second straight weekly decline and the lowest horizontal rig count since Sept. 3. The gas-directed rig count hit 992 in mid-August, its highest level since February 2009 when there were 1,018 rigs drilling for gas."

Low gas prices, now barely trading above $3, have some expecting drilling to slow further as producer profit margins get squeezed. Some firms like Conoco and Encana have hinted at slowing gas output or shifting spending to more oil-related ventures. But most analysts don't expect any meaningful slowdown in production until the second half of 2011, with some noting the gas-directed rig count will have to fall to 850 or even 750 to finally balance an oversupplied gas market. The U.S. natural gas drilling rig count is still up 300 since bottoming at 665 on July 17, 2009, its lowest level since May 3, 2002, when there were 640 active gas rigs. While the gas rig count is 40% off its record peak of 1,606 from September 2008, it stands 240 rigs, or 33%, above the same week last year. Rising output from shale gas has been the primary driver of increased gas production in the last few years, and most traders agree it will be difficult to tighten the gas market unless shale drilling activity slows sharply.

Recent EIA estimates still put U.S. gas output this year at more than 22 trillion cubic feet, its highest since 1973, but next year EIA sees output dropping by 1.5%. With gas inventories set to head into winter at near record high levels and production likely to remain strong into 2011, many traders expect prices to remain on the defensive until an improving economy kicks up industrial demand, which accounts for nearly 30% of total U.S. gas consumption.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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