MARKET WATCH: Energy prices fall again in confused market

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 29 -- Energy prices fell June 26 on expectations that the US House of Representatives would pass the sweeping Waxman-Markey energy and climate change bill; passage came late in the day by a vote of 219 to 212.

On the same day, the US savings rate hit 6.9%—the highest level in 15 years—with personal incomes reflecting tax cuts and consumer spending on the rise, notably in car sales. However, income earners still are struggling to balance budgets and many are overloaded with debt. In New Orleans, analysts at Pritchard Capital Partners LLC said, “Some saw the increase in the US savings rate as a ‘reality check’ that spending will be subdued in the coming months and lead to lower demand for crude and refined products.”

In Houston, analysts at Raymond James & Associates Inc. said crude was up in early trading June 29 following another attack on oil operations in Nigeria and despite a bearish global oil demand revision issued by the International Energy Agency. “Over the weekend, Royal Dutch Shell PLC closed a major oil field in Nigeria after several production wells were attacked by a major militant group in the area. IEA reduced its medium-term (2008-13) global oil demand forecast to average 87.9 million b/d based on the expectation of prolonged economic weakness. The revision cut oil demand every year through 2013 by 3.4 million b/d vs. its previous forecast (in December) predicting consumption would not reach 2008 levels until 2012,” Raymond James analysts said. Natural gas was lower in early trading June 29.

Raymond James analysts also noted continuing discord over Iran. They said: “There are two roads ahead for the Iranian nuclear standoff. One road leads to a peaceful solution, a diplomatic compromise under which Iran fully complies with its obligations, presumably in exchange for some ‘carrots’ from Europe or others. The second road leads to higher oil prices. At best, this second road includes the imposition of meaningful economic sanctions, and if that doesn't work, potentially, military action.

“If President Mahmoud Ahmadinejad stays in office, Iran is clearly set to continue heading down the second road, but even if he is replaced by a more moderate figure like Mir Hossein Mousavi, that route remains a real possibility. Assuming we are already headed down the second road, the question then shifts to timing. We think the odds of imminent military action are slim as President Barak Obama struggles to find his place as a world leader. That said, we think the odds of an Iranian oil problem begin to rise rapidly through 2010 as Iran presumably approaches the ‘point of no return’ for nuclear weapons capability.”

Still, Raymond James analysts said: “Iran is hardly the only source of geopolitical risk for the oil market. Russia has long been playing hardball with international oil companies. Venezuela has expropriated foreign-owned oil properties (and, more recently, oil service equipment). And Nigerian oil production has suffered chronic disruptions because of de facto civil war. All in all, to state the obvious, world peace isn't breaking out, certainly not in oil-producing countries (regardless of the spin that the Obama administration may like to put on it).

“For all these reasons, a geopolitical risk premium of some magnitude, looks set to remain in oil prices on a permanent basis. As the market comes to recognize this reality, combined with improving visibility on global oil demand, we look for oil prices to continue drifting higher to the $80-plus level towards the end of 2010. And if war with Iran becomes inevitable, then oil goes a lot higher.”

Pritchard Capital Partners noted: “Crude is very much a global commodity, and the Chinese remain focused on building crude reserves. The Chinese have lent money to Petrobras and Rosneft and last week bought Addax Petroleum. The Ghana Business News is now reporting that China National Offshore Oil Company (CNOOC) may have bid $4 billion for Kosmos’ stake in the Jubilee field located in offshore Ghana. Although the US remains the largest consumer of crude, the Chinese are aggressively increasing the size of their energy footprint in order to meet future demand growth. China also plans to increase its strategic crude oil reserves by 160% to 270 million bbl over the next 5 years, and will begin building a second group of stockpiling bases as early as this year, at a cost of $4.39 billion. The second group will be composed of eight sites with a total capacity of 169 million bbl. Once full, the first group of storage facilities will contain roughly a 20-day supply; the Chinese government aims to have a 90-day supply on hand by 2020, putting it on par with industrialized nations, and is considering building a third group of storage facilities.”

At the Centre for Global Energy Studies (CGES), London, analysts said June 29, “The oil market may be on the threshold of such a 'crisis' right now, requiring a paradigm shift of its own to overcome certain anomalies that have surfaced in recent years.”

CGES analysts said: “When oil demand is growing at a faster pace than supplies, reducing oil inventories in the process, oil prices should rise, according to the theory of short-run price dynamics. Since dated Brent surged by a hefty 60% between the third quarter of 2007 and the second quarter of 2008, a substantial fall in inventories should have been observed. The Organization for Economic Cooperation and Development [member countries’] commercial oil stocks did indeed decline during this period, but by a mere 2.5%, while OECD forward oil stock cover—for many analysts a more important measure of market tightness—actually rose from 54 days in the third quarter of 2007 to 55 days in the second quarter of 2008.”

They said, “As everyone knows, the price of oil subsequently crashed, dropping by 63% between second quarter 2008 and first quarter 2009; did we observe a massive increase in oil inventories during this interval? Oil stocks in the OECD did in fact rise, but by an unimpressive 5%. This time, however, there was a 4-day increase in OECD forward stock cover, which seems significant, but in the second quarter stock cover rose by a day's worth over the first quarter of this year at a time when dated Brent surged by 32%, which does not make sense.”

They said, “It seems that the link between changes in oil inventories and oil prices, as proposed by the classic theory of short-run price dynamics, is indeed rather tenuous. There seems to be another force acting on oil prices, on occasion exaggerating the expected reaction of these prices to inventory changes and at other times causing them to behave in a counter-intuitive fashion. In this the oil market resembles modern cosmology, which has had to resort to hitherto unseen ‘dark matter’ and the mysterious ‘dark energy’ to explain the observed acceleration in the expansion of the universe.” They concluded, “Perhaps it is time for the oil market to undergo its own paradigm shift, by which a new theory of shortrun oil price formation will be able to account for the observed price anomalies.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped $1.07 to $69.16/bbl June 26 on the New York Mercantile Exchange. The September contract fell $1.06 to $70.02/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.07 to $69.16/bbl. Heating oil for July delivery decreased 4.6¢ to $1.73/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 2.42¢ to $1.87/gal.

The July contract for natural gas gained 10.5¢ to $3.95/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ to $3.82/MMbtu.

In London, the August IPE contract for North Sea Brent was down 86¢ to $68.92/bbl. Gas oil for July lost $10.50 to $557.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 75¢ to $69.26 on June 26. So far this year, OPEC’s basket price has averaged $50.63/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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