MARKET WATCH: Alaska pipeline outage hikes crude oil prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 11 -- The price of crude oil rebounded from a 3-week low Jan. 10 in the New York futures market but failed to break through the resistance level of $90/bbl with the Trans Alaska Pipeline still closed for the third consecutive day.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. reported natural gas prices declined 0.4% in the futures market “on (surprise) conflicting weather forecasts for the remainder of the winter.” The broader equity market recovered from early losses and ended flat “as strong fourth quarter earnings were released,” they said. “Energy stocks were mixed.”

Workers are building a 24-in., 170-ft bypass around the leaking pump station to reopen the Alaska pipeline. Oil already coming down the pipeline is being put in storage at that location, and authorities have not indicated how long repairs will take with work continuing around the clock (OGJ Online, Jan. 10, 2011).

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said the prospect that some refinery throughput might be impacted by the pipeline outage also pushed the product cracks higher, but those cracks reversed “to some extent” in early trading Jan. 11 “as there appears to be sufficient crude inventory not to reduce refinery runs.” He said, “Outage of the Alaska pipeline predominantly affects refineries around the West Coast of the US, whose alternative crude imports are priced mostly on a Brent and Oman related basis. This reinforces the relative weakness of West Texas Intermediate vs. Brent.”

Zhang said the term structure of WTI continued to weaken in anticipation of later reports this week of increased inventory at Cushing, Okla.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Some of the front WTI exposure is not being rolled to the second month and the selling on the front WTI is widening the contango on WTI and the discount of WTI to Brent, which widened again [Jan. 10] to more than $6/bbl which is a huge number by any account. The widening of the contango on WTI works against the returns of the record speculative length in WTI and should be a capping factor on speculative investments in WTI as on a rolling basis the investors and speculators are holding a yearly roll cost of $16/bbl for the pleasure of holding a long position in WTI.”

Jakob observed, “While the Organization of Petroleum Exporting Countries is still not officially moving as Brent gets within easy reach of $100/bbl, we have to note that OPEC supplies should be on the increase as Iraq has been reporting higher production levels. The expected increase in Iraqi crude oil supplies are one of the main challenges for an official quota increase for the rest of OPEC in 2011. Iraqi crude oil production is reported to be currently between 2.6 [million b/d] and 2.7 million b/d and that compares [with] an IEA estimate in November of 2.48 million b/d.”

He predicted, “[Jan. 12] will be a key day for the euro due to the Portuguese bond auction. So key that we have to expect some hidden market intervention to reassure everyone that there are no problems in the ‘euro wonderland.’ With the Brent premium to WTI and the weak euro, European countries are getting closer to the choking point in terms of prices at the pump.”

Energy prices
The February contract for benchmark US sweet, light crudes climbed $1.22 to $89.25/bbl Jan. 10 on the New York Mercantile Exchange. The March contract escalated $1.36 to $90.58/bbl.

On the US spot market, WTI at Cushing was up $1.22 to $89.25/bbl. Heating oil for February delivery advanced 6.98¢ to $2.56/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 4.12¢ to $2.45/gal.

“Despite the disruptions in Alaska, WTI did not manage to do much better…than the opening gap” in Jan. 10 trading, Jakob said. “It did manage to close above the 5-day moving average but only by a few points, and if WTI wants to reverse the current negative moving average momentum, it will need to confirm with another close above the 5-day moving average ($89.07/bbl) [in the Jan. 11 session].

The February natural gas contract dropped 2.3¢ to $4.40/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 6¢ to $4.49/MMbtu.

In London, the February IPE contract for North Sea Brent crude climbed $2.37 to $95.70/bbl. Gas oil for January was up $13.50 to $782.50/tonne.

“With the strong volatility in the spread between Brent and WTI,” Jakob said. “Brent is back to testing the resistance of $96/bbl. Given the Brent-WTI movements, Brent is not defining a strong momentum (stuck for now between $92-96/bbl). A break of $96/bbl could attract some fresh momentum buying to Brent but given the weakness of the euro, we will be then exposing the European economies to a retest of the summer of 2008.”

The average price for OPEC’s basket of 12 reference crudes increased 50¢ to $91.33/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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