MARKET WATCH: Sell-off pulls down WTI, Brent crude prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 7 -- Energy markets fell Feb. 4 with benchmark crudes dropping below $100/bbl in London and under $90/bbl in New York as traders positioned themselves in case Egyptian President Hosni Mubarak might have been ousted over the weekend, reducing a possible geopolitical threat to world oil supplies.

Natural gas prices fell as the National Weather Service's forecast for Feb. 12-16 is for above-average temperatures throughout the central and eastern thirds of the country after unusually frigid temperatures last week.

Meanwhile, officials from the Mubarak administration began negotiations over the weekend with some of the demonstrators in an attempt to delay Mubarak’s departure until elections later this year. “The unrest in Egypt appears to have quieted down to some extent, with Egyptian banks reopening for the first time in more than a week. Fears of disruption to the Suez Canal and Sumed (Suez-Mediterranean) Pipeline are receding, while concerns that the spread of the political instability also appear to be dissipating,” reported James Zhang at Standard New York Securities Inc., the Standard Bank Group.

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts cited earlier market fears that mass protests such as those that recently overthrew Tunisia’s dictatorship and will apparently oust Mubarak might spread to oil-producing nations in North Africa and the Middle East. “This has put a geopolitical fear premium of at least $5/bbl back into the price of crude,” they said.

Although the outcome in Egypt is not yet known, KBC analysts noted the only negative effects on the nation’s oil industry have been “the exodus of personnel and transportation difficulties related to the protests.” They said, “The army, which to date has appeared to side more with the protesters rather than the government and its supporters, has secured the Suez Canal area and is ready to act if the turmoil threatens oil and energy infrastructure. So we are likely to see prices revert lower…when the political temperature reduces, particularly given the recent murmurings from the Organization of Petroleum Exporting Countries hinting at more “flexibility” in the face of the latest rally.”

Although OPEC earlier said it saw no need for a production hike that some have called for, Sec. Gen. Abdallah al-Badri recently indicated the possibility of a policy discussion among members Feb. 22 at an International Energy Forum meeting in Riyadh.

Zhang said, “The oil market is likely to continue to be led by political developments in Egypt and the wider Middle East, although perhaps to a lesser extent. Further solid macroeconomic data is likely to continue lending support to oil prices, though currency moves are also likely to play a big role in the coming weeks in shaping the oil market.”

At Barclays Capital Commodities Research in New York, analysts said, “With benchmark oil prices [recently] back above the psychological barrier of $100/bbl, the question of whether the economic recovery will be derailed and oil demand affected has returned with a vengeance.” But after analyzing implications of the recent rise in oil prices on the US economy and US oil demand and assessing potential consequences of further price hikes, they said, “In our view, current price levels do not generate enough attrition to imperil the economic recovery and the progression of US oil consumption.”

WTI-Brent spread
Zhang said the price spread between West Texas Intermediate and North Sea Brent narrowed to $10.80/bbl in Brent’s favor on Feb. 4. “The term structures for both WTI and Brent weakened, with the sell-off being focused towards the front end of the curves,” he said.

US light crude in the New York market “has become largely irrelevant as a benchmark because infrastructure constraints at landlocked Cushing, Okla., delink it from the Gulf Coast market,” said KBC analysts. “WTI has been trading close to $12/bbl discount to broadly similar grades…that can be delivered into the USGC. Particularly as we move out of the spring maintenance season, we should see some gradual narrowing of the discount of WTI futures to other domestic and international grades.” However, they stand by an earlier KBC forecast that “the Brent-WTI spread will remain inverted for at least the next couple of years as volumes through the Keystone pipeline funnel more oil into storage at Cushing.”

Energy prices
The March contract for benchmark US light, sweet crudes fell $1.51 to $89.03/bbl Feb. 4 on the New York Mercantile Exchange. The April contract dropped $1.39 to $91.85/bbl.

On the US spot market, WTI at Cushing was down $1.51 to $89.03/bbl in lock step with the front month futures contract price. Heating oil for March delivery declined 5.07¢ to $2.72/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 6.81¢ to $2.44/gal.

The March natural gas contract decreased 2.7¢ to $4.31/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18.5¢ to $4.50/MMbtu.

In London, the March IPE contract for Brent crude traded as high as $102.48/bbl in the Feb. 4 session before closing at $99.83/bbl, down $1.93 for the day. Gas oil for February lost $17.50 to $843.25/tonne.

The average price for OPEC’s basket of 12 reference crudes was down 86¢ to $96.85/bbl on Feb. 4. So far this year the OPEC basket price has averaged $93.52/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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