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.

Related Articles

TAEP: TPI still peaking, but ‘contraction unavoidable’ as oil prices fall

12/12/2014 The Texas Petro Index (TPI), a composite index based on a comprehensive group of upstream economic indicators released by the Texas Alliance of Ene...

MARKET WATCH: NYMEX crude oil price extends slump

12/12/2014 Crude oil prices extended their slump on the New York market with a Dec. 11 settlement of less than $60/bbl for January, and prices continued downw...

US needs more data before ending crude export ban, House panel told

12/11/2014 Much more environmental impact information is needed before the US can reasonably remove crude oil export limits, a witness told a House Energy and...

Rosneft, Essar sign terms of oil supply agreement

12/11/2014 OAO Rosneft and Essar Energy PLC have signed key terms of an oil supply agreement in New Delhi. Rosneft said shipments to India may begin in 2015.

Barton introduces bill to remove US crude export limits

12/11/2014

US Rep. Joe Barton (R-Tex.) introduced legislation that would remove US crude oil export limits that have been in place for nearly 40 years.

MARKET WATCH: NYMEX crude oil price slides below $61/bbl

12/11/2014 Crude oil prices fell below $61/bbl for January delivery on the New York market Dec. 10 after the Organization of Petroleum Exporting Countries low...

MARKET WATCH: US crude oil prices rebound modestly awaiting inventory report

12/10/2014 Crude oil prices rose modestly on the New York market Dec. 9 while analysts awaited the US government weekly inventory report on crude oil and prod...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/10/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

MARKET WATCH: Crude oil prices briefly dip to 5-year lows

12/09/2014 Oil prices on the New York and London markets remained volatile, briefly trading around lows not seen since 2009 although prices were attempting to...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts



The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST



On Demand

Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST


Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected