MARKET WATCH: Crude, natural gas end rallies in New York market

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 25 -- The front-month crude contract dipped from a 30-month high Mar. 24, ending a 4-day rally in the New York market. Natural gas was down 2%, stopping a 3-day run after the Energy Information Administration reported a smaller-than-expected withdrawal from US underground storage the previous week.

However, analysts in the Houston office of Raymond James & Associates Inc. reported oil, gas, and equity stock prices were up in early trading Mar. 25.

Both West Texas Intermediate and North Sea Brent failed Mar. 24 to break through the highs reached at the beginning of March. “The term structure in WTI also weakened, together with the WTI flat price, while the term structure for Brent and ICE gas oil remained broadly unchanged,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. He said the reformulated blend stock for oxygenate blending (RBOB) crack made additional gains following the hefty 5.3 million bbl draw from the US gasoline inventory that EIA earlier reported (OGJ Online, Mar. 23, 2011).

Unrest in the Middle East and North Africa (MENA) region remains the major influence on oil markets. “It’s reported that thousands were protesting on the street of Syrian city of Derra yesterday, while the Yemeni president is reported to be negotiating a deal for his resignation,” said Zhang. “In the meantime, the diplomatic spat between Bahrain and Iran appeared to be escalating, as Bahrain’s foreign minister warned that the disputes between the countries could lead to conflicts.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “It is very likely that today will turn out very violent in Yemen and maybe too in Syria, but this is starting to be a weekly routine for oil markets, and an additional geopolitical premium will require a greater fear that revolts may spread to Saudi Arabia.” So far, the Saudi kingdom has been able to pacify its citizens “despite a few small protests.”

In other news, the North Atlantic Treaty Organization agreed to take command of the no-fly zone over Libya. However, that “has not changed the fact that no clear end-game has been spelled out for Libya,” Zhang said.

“The West’s military capacity is now stretched to the limit (Iraq, Afghanistan, Libya) and [Western nations] will have to let the Gulf Cooperation Council (GCC) countries (who are helping politically by sending warplanes to the coalition against Libya) handle their protests with an iron fist,” said Jakob. Although the United Nations refused use of coalition ground troops in Libya, he noted, “The US amphibious attack group Bataan left the US yesterday for Libya where it will join the [US amphibious assault ship] Kearsarge.”

Jakob said, “If there has been a lot of MENA unrests priced in since the start of the revolt in Egypt, we do believe that markets still do not know how to fully price in the situation in Japan. It was 2 weeks ago to this day that the tsunami hit Japan, and the situation in Daiichi has not improved. The Japanese authorities are likely to increase further the scale of the nuclear accident, and with some shipping companies refusing to sail to the Tokyo bay for fear of contamination, we have to consider that some of the financial institutions that were calling the tsunami bullish for the Japanese economy (reconstruction spending) will need to revise some of the rosy outlook as the radiation continues to leak.”

In financial markets, the eurozone sovereign debt crisis deteriorated as the Portuguese government fell and its debt was downgraded. “Nevertheless, the latest development has failed to weaken the euro, as the market appears to be fixated on MENA and Japan,” Zhang said. “The macroeconomic data from the US yesterday were mixed, with weekly employment number meeting market expectation while durable goods orders lagged, which weighed on the oil market.”

Looking ahead, he said, “The market will continue to focus on the persistent tensions in MENA, which pose further upside risks to oil prices. That said, the physical market appears to be well supplied for now and the eurozone debt crisis resurfaces. Given the near-record-high speculative length in the oil market and a seasonal slowdown in demand, the downside risk also increases.”

Meanwhile, Jakob said, “The combination of another war hitting an oil producing country (Libya), a nuclear risk in a major industrialized country (Japan), and high oil prices (world) has resulted in a continued slowdown in the volume traded on oil futures but also in the disappearance of volume on options.”

Energy prices
The May contract for benchmark US light, sweet crudes rose above $106/bbl in intraday trading Mar. 24 on the New York Mercantile Exchange before closing at $105.60/bbl, down 15¢ for the day. The June contract decreased 10¢ to $106.11/bbl. On the US spot market, however, WTI at Cushing, Okla., gained 35¢ to match up with the front-month futures contract at $105.60/bbl.

Heating oil for April delivery inched up 0.7¢ but closed essentially unchanged at a rounded $3.06/gal on NYMEX. RBOB for the same month gained 2.35¢ to $3.04/gal.

The April natural gas contract dropped 9.1¢ to $4.24/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 7¢ to $4.28/MMbtu.

In London, the May IPE contract for North Sea Brent crude increased 17¢ to $115.72/bbl. Gas oil for April lost $6.25 to $981.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes declined 28¢ to $110.81/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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