MARKET WATCH: Oil prices drop; gas prices rise on profit taking

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 1 -- The price of front-month crude dropped 0.8% Feb. 28 in the New York market after Saudi Arabia again pledged to cover any supply disruption from strife-torn Libya, easing traders’ worries, while natural gas rose 0.9% on profit taking.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said crude prices were down at the end of February “due to profit taking on a hiatus of uglier news out of Libya.” However, he said, “It seems that the situation in Oman, too, is now getting more alarming by the day. Oman produces between 800,000 and 900,000 b/d, and unrest in the country could very quickly exacerbate the already grim situation.”

In midday trading Mar. 1, the April crude contract climbed past $98/bbl in New York while North Sea Brent topped $113/bbl in London as Iran clamped down on protestors in that country and unrest spread in the Middle East, threatening to sustain high energy prices for months.

“Oil drifted lower [on Feb. 28] as the market appeared to view the supply disruption from Libya to be less serious than initially expected,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The term structures for West Texas Intermediate and Brent continued to weaken after Brent traded [Feb. 24] at the steepest backwardation since mid-2008.” That indicates “precautionary demand [is] taking over on the buying side for crude, while the product markets show a subdued real demand picture,” he said.

Net for February, front-month WTI gained $6.22/bbl and Brent was up $10.7/bbl due to political unrest in the Middle East and North Africa (MENA).

Economic effects
Zhang said, “The focus now is to what extent the current high oil price will affect the global economy. Even if the oil price doesn’t climb any higher from its current level, consumers and oil-importing countries are set to pay more for oil than what they did in 2008 on an annual basis. As energy consumption is fairly inelastic, high oil prices will divert money away from consumption of goods and services. Consequently, this will put a drag on the global economy.”

Although the broader equity market was up 0.6% Feb. 28 on speculation of mergers and acquisitions, stock prices dropped Mar. 1 after Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee rising oil prices could hurt the economy. A report that construction spending had dropped to its lowest level in nearly a decade also undercut the market.

Bernanke continued to defend the Fed's $600 billion bond-purchase program, which he said is successful despite continued criticism by market analysts, and predicted only a temporary increase in inflation.

Zhang said, “The extreme volatility seen in the market last week has likely prompted some risk aversion from many market participants. For now, the spotlight remains fixed on the unrest in the MENA region, which continues to pose upside risks to oil prices.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The Saudi unilateral decision to increase supplies also implies that the Organization of Petroleum Exporting Countries’ quotas are de facto written off, and Kuwait has already started giving signs that it will likely follow the steps of Saudi Arabia. At current prices it makes sense for both Kuwait and the UAE to also increase supplies rather than stay idle and watch Saudi Arabia increase its market share.”

He said, “Average gasoline prices in the US have increased to the highest level since mid-April 2008, and this will be a new test [of] demand when current US gasoline demand is still 3% lower than 2008. Pakistan has decided to increase its domestic price of transportation fuels by 10%. It already tried that in the first days of January but had to reverse the decision after a week due to fears of popular protests. It will be interesting to see this time around how long they can hold to that decision. In China, the PMI [Purchasing Manager's Indices] data, official and unofficial, are showing a slowdown and a continued increase in input cost.”

Jakob added, “The euro continues to be bid up in anticipation of a sign that higher interest rates are coming in Europe. We continue, however, to be worried about the high yields that Portugal needs to pay and the extreme usage of the European Central Bank’s overnight marginal lending facility, which is not coming off.”

MENA hot spots
Zhang reported, “The market was initially caught out by the Egyptian turmoil, which eased off later with little impact to global oil flows after the army took over control of the country. Then, the turmoil spread to Libya, which has caused an estimated reduction of 850,000 b/d in crude oil supply. With no clear direction as to how the Libya situation will play out, further deterioration is a possibility. Meanwhile, concerns were also raised over protests in Oman, which is also a significant oil producer, exporting approximately 700,000 b/d to the global market.”

Barclays Capital analysts in New York and Europe reported, “Foreign companies that have evacuated their employees and halted their operations [in Libya] may be reluctant to restart production if the political and security environment remains unsettled. The east, where most of the oil fields are located, could be particularly problematic.”

They noted, “With Libya engulfed by violence, there are fears that Algeria may be the next big energy producer to become destabilized by antigovernment demonstrations. The Algerian government has taken concerted steps to protect the energy infrastructure and the country's geography makes attacks on the oil and gas fields extremely difficult. We therefore believe that the energy infrastructure in Algeria is less at risk from the current wave of unrest than petroleum production and exports in Libya and in several other politically volatile producing countries.”

Iraq’s energy sector may be at increased risk for further attacks “if the public mood continues to sour,” Barclays Capital analysts said. On Feb. 26, militants in northern Iraq detonated several bombs and attacked guards at the country’s largest refinery, killing four people and damaging the 310,000-b/d Baiji facility.

“Oman should be added to the list of MENA countries facing a disruption threat, though it still ranks behind Libya and Iraq, in our view,” the analysts said. On Feb. 28 demonstrators seeking political reforms and new job programs blocked roads to the main port and refineries in the northern industrial town of Sohar. “Protests have now spread to Muscat,” they said. “Exports were unaffected although the flow of trucks into the port was curtailed. In general, it serves to deepen fears of wider regional contagion.”

However, Barclays Capital analysts said, “Perhaps the biggest risk of another major supply disruption comes not from a MENA nation, but Nigeria. With the MENA unrest dominating the 24-hr news cycle, the fact that the largest oil producer in Africa is poised to hold elections on Apr. 9 has seemingly slipped under the radar. Nigerian elections have been accompanied by considerable violence, particularly in the oil region. The two previous election cycles were marked by sharp rises in oil theft and attacks on the energy infrastructure in the months leading up to the polls and in the immediate post-election period.”

The analysts concluded, “The longer the Libyan outage lasts, the faster the existing [OPEC] spare capacity (which was already falling due to the recent demand shock) will erode. Further, if any of the [pending] risks…were to materialize, the pressure on spare capacity will be immense, as will be that on oil prices over the course of 2011, accompanied by a significant degree of volatility.”

In other news, Zhang said, “US consumer spending rose less than forecast in January on the back of increasing food and fuel prices and adverse weather conditions. In contrast, the Chicago purchasing managers index rose to the highest level since July 1988. The economic data in the US continue to show that the manufacturing sector has regained some strength, while consumers appear to be pausing.”

Energy prices
The April contract for benchmark US sweet, light crudes fell 91¢ to $96.97/bbl Feb. 28 on the New York Mercantile Exchange, more than wiping out its gain from the previous session. The May contract also gave back more than its previous gain, dropping 72¢ to $98.64/bbl. On the US spot market, WTI at Cushing, Okla., was down 92¢ to $96.97/bbl, back in step with the price for the front-month futures contract.

Heating oil for March delivery dipped 0.51¢ but closed essentially unchanged at a rounded $2.93/gal on NYMEX. The expiring contract for reformulated blend stock for oxygenate blending in the same month slipped 0.99¢ to $2.73/gal.

The April natural gas contract continued climbing, up 3.2¢ to $4.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., shot up 15.3¢ to $3.94/MMbtu, more than regaining its previous loss. Gas prices rose “as the weather models projected that the fleeting winter would provide some more demand support before vanishing completely. The 10-15 days out weather outlooks are now projecting that the temperatures across much of the US will drop below normal,” said Sharma. Moreover, he noted the Energy Information Administration’s Form 914 data released Feb. 28 showed in the Lower 48 gas production was largely flat month-over-month in December, increasing only 160 MMcfd, including a 130 MMcfd gain in the Gulf of Mexico “where some of the maintenance related shut-ins got reversed.”

In London, the April IPE contract for North Sea Brent crude lost 34¢ to $111.80/bbl. Gas oil for March escalated by $11 to $932.25/tonne, more than regaining its previous loss.

The average price for OPEC’s basket of 12 reference crudes increased 19¢ to $108.50/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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