MARKET WATCH: Oil prices jump higher in fear of federal closing

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 11 -- The front-month crude contract jumped 2.5% to a new 2½-year high Apr. 8 in the New York market as the US dollar’s value fell against the euro and traders positioned themselves for a possible shutdown of the US government prior to a last minute budget deal between President Barack Obama and Republican representatives.

Skepticism that Libyan production levels will return to prerevolution levels after fighting ends in that country also contributed to the jump in crude prices. “With Saudi Arabia's excess capacity quickly dwindling, any further [revolution] contagion to oil producing countries in the region could severely disrupt the world's supply-demand balance,” said analysts in the Houston office of Raymond James & Associates Inc. They reported energy stocks lagged behind the oil price rally while the broader equity market declined 0.2% in fear of soaring crude prices as well as a government shutdown.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil soared Friday on a weakening dollar and violence ahead of Nigeria's upcoming election.” Reformulated blend stock for oxygenate blending (RBOB) largely tracked the price of West Texas Intermediate in New York, “while heating oil outperformed as it tends to track [North Sea] Brent more closely.” Zhang said, “The term structure for WTI remained broadly unchanged, while the term structure for Brent surged on fears of supply disruptions in Nigeria.”

Net gains through last week for front-month crude contracts totaled $4.85/bbl for WTI and $7.95/bbl for Brent, “despite rate increases from China and the European Central Bank and Portugal's bail-out.” Zhang reported, “Concerns over further supply disruptions dominated the market due to persistent conflicts in the Middle East, North Africa (MENA) region. The upcoming Nigeria election adds to the uncertainties.”

Minutes from the Federal Open Market Committee—the policy-making arm of the Federal Reserve Bank—indicating loose monetary policies are to continue also buoyed oil prices last week, while US economic data were mostly positive, he said.

Meanwhile, the Africa Union (AU) announced Libyan dictator Moammar Gadhafi accepted a peace roadmap proposed by union members who are now negotiating with the Libyan rebels. “If the peace deal brings an end to the military conflict in Libya, it can alleviate the supply disruption from Libya and, to some extent, fears for further significant unrest in the MENA region,” Zhang said.

The Standard & Poor’s 500 index “stalled as it has regained all the ground since mid-February and as the continued surge in oil prices start to be a greater worry factor for the global economic recovery,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The S&P 500 was down 0.32% during [last] week and is up 5.61% for the year while the NASDAQ is down 0.33% for the week and up 4.81% for the year. The NASDAQ is still sitting just below the resistance line set by the peaks of 2007,” he said.

Jakob said, “A main risk factor in equities remains the very low volume being traded. The 5-year average of daily volume in the New York Stock Exchange is half what it was in 2007. The problem with the so-called ‘wealth creation’ of the S&P gaining 27% since the end-August announcement of QE2 [the second phase of the Fed’s quantitative easing] is that the gains have been obtained with no volume and no visible risk appetite from retail investors. Now, with the oil prices starting to work against consumer confidence, it is harder and harder to see the benefit that QE will bring given that the inflation that it has created is working against the ‘wealth creation’ of a higher S&P.”

He noted, “Since the start of 2011, the US Fed has brought $345 billion of liquidity to the financial markets through the primary open market operations (POMO), and cash assets held by US commercial banks have increased over the same period by $480 billion to reach new all time record highs; and the trend is rising. The amount of commercial and industrial loans by US commercial banks is unchanged compared to a year ago despite QE2, but cash assets held by the US banks are increasing.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “The recent surge in oil prices is part of a wider upsurge in commodity prices, which is fuelling inflation around the world. Gold prices have hit record high prices at around $1,465/oz, corn prices are also hovering near record highs, and copper prices have shot higher in recent weeks.” They pointed out, “Record gold and food prices have stoked inflationary concerns for governments around the world, and the oil price hikes are also leading to inflation as distribution costs soar in consuming countries that do not subsidize fuels.”

Meanwhile, the Washington-based International Monetary Fund “added fuel to the fire [by] warning that prices could hit $150/bbl. In its World Energy Outlook, the IMF said oil prices could rise rapidly as growing oil demand in emerging economies such as China met with supply constraints as oil fields mature,” said KBC analysts.

On Apr. 11, Raymond James analysts raised their 2011 average price estimate for WTI to $101/bbl from $90/bbl previously. Their 2011 estimate for North Sea Brent was hiked to $111/bbl, up from $98/bbl previously. For 2012, their estimates increase to $118/bbl for WTI from $100/bbl previously and to $125/bbl for Brent from $105/bbl. “Lastly, our long-term forecast for both WTI and Brent rises from $110/bbl to $125/bbl,” they said.

Energy prices
Prices for benchmark crudes rose $2.49 for both the May and June contracts Apr. 8 to $112.79/bbl and $113.37/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was up $2.49, to $112.79/bbl, matching the May contract price.

Heating oil for May delivery gained 11.37¢ to $3.32/gal on NYMEX. RBOB for the same month increased 7.42¢ to $3.26/gal.

The May natural gas contract lost 1.6¢ to $4.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 9.7¢ to $4.02/MMbtu.

In London, the May IPE contract for North Sea Brent crude shot up $3.98 to $126.65/bbl. Gas oil for April escalated by $28.50 to $1,053/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $2.36 to $117.65/bbl. So far this year, OPEC’s basket price has averaged $102.59/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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