MARKET WATCH: Oil prices remain mixed at high levels

Sam Fletcher
Senior Writer

HOUSTON, Feb. 21 -- The front-month March contract dipped lower Feb. 18 in the New York market, but the April contract continued to climb with subsequent months posting gains but still in contango at least through April 2012.

“Oil traded sideways on Friday at an elevated level amid continuous tensions in the Middle East and North Africa (MENA) region,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The term structures for both West Texas Intermediate and North Sea Brent also weakened.”

He added, “Over the weekend, the turmoil in Libya appears to have escalated, which has sent oil higher this morning [Feb. 21]. Libya, a member of the Organization of Petroleum Exporting Countries, produced around 1.6 million b/d of crude oil during 2010, of which approximately 1.5 million b/d were exported, mostly to Europe. Therefore, unlike Egypt the situation in Libya has the potential to have a big impact on global oil supply. Latest news that has emerged is that oil output has stopped at Libya’s Nafoora field as workers have gone on strike.”

Zhang also noted China announced a further 0.5% increase on the national bank’s reserve ratio to a new record of 19.5%, effective Feb. 24. “This is the eighth time since the beginning of 2010 that China increased the bank’s reserve ratio. China also increased its benchmark interest rate by 25 basis points the week before last. Given that inflation remains high, the market expects further tightening this year,” he said.

US financial markets are closed Feb. 21 for the US Presidents Day holiday. “The political turmoil in the MENA regions will continue to lead the market. However, trading volumes are likely to be relatively low as the International Petroleum Week is scheduled for this week in London with many market participants attending,” said Zhang.

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “Geopolitical tensions have pushed oil prices, represented by international benchmark grade North Sea Brent blend, above $100/bbl. Even higher prices cannot be ruled out, particularly if the wave of unrest in the Middle East that has toppled regimes in Tunisia and Egypt and has now affected Bahrain, Libya, Iran, Iraq, and Yemen were to lead to instability in larger gulf oil producers.”

The International Energy Agency in Paris has said $100/bbl oil threatens the global economic recovery. However, KBC analysts claim, “There is no single oil price threshold that will instantly throw world oil demand into reverse and the world back into recession. Indeed, because of the lag between oil prices and gasoline and electricity prices, the impact of $100/bbl oil will take several months to filter through into the economic data.”

Also, because oil prices have been driven towards $100/bbl largely by the strength of economic and oil demand growth rather than any supply bottleneck, they said, “We are unlikely to repeat the boom-bust cycle of 2008. Although there is clearly a geopolitical risk premium of perhaps $5-10/bbl in the oil price, oil demand growth in emerging markets has been the key driver for higher prices and these economies (Brazil, Russia, India, China, and developing Asia) show no signs of slowdown.”

Nevertheless, KBC analysts said, “Past history suggests that oil prices upwards of $90/bbl, and certainly above $100, do generate a demand response in key oil consumers.”

Energy prices
The March contract for benchmark US light, sweet crudes dropped 16¢ to $86.20/bbl Feb. 19 on the New York Mercantile Exchange, but the April contract gained 87¢ to $89.71/bbl. On the US spot market, WTI at Cushing, Okla., was down 16¢ to $86.20/bbl.

Heating oil for March delivery declined 1.95¢ to $2.71/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, increased 2.36¢ to $2.55/gal.

The March contract for natural gas inched up 0.8¢ to $3.88/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 3.5¢ to $3.84/MMbtu.

In London, the April IPE contract for Brent dipped 7¢ to $102.52/bbl. Gas oil for March fell $12.75 to $860.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dropped 69¢ to $99.08/bbl. So far this year, OPEC’s basket price has averaged $94.76/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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