MARKET WATCH: OPEC deadlocked; production quotas remain unchanged

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 8 -- In a surprise announcement, ministers of the Organization of Petroleum Exporting Countries said they were deadlocked and unable to reach any agreement at their June 8 meeting in Vienna, leaving official production quotas unchanged for possibly 6 more months.

Outside observers generally expected OPEC to raise the official quota at least to match unofficial production, which would have reduced crude prices without adding new supply. The Associated Press reported, “Analysts covering OPEC for more than 20 years said they could not remember any other time that the normally closed group had admitted to such divisions in its ranks. Some even saw the abortive meeting as a harbinger of demise for the organization.”

Observers have been predicting the imminent demise of OPEC almost from its beginning 50 years ago, however.

OPEC’s failure to take action triggered an immediate jump in crude prices in markets then in session. The cartel’s next scheduled meeting is Dec. 14 in Vienna.

Olivier Jakob at Petromatrix, Zug, Switzerland, pointed out, “What will count is the real increase of Saudi crude oil production, not the formal OPEC statement.” He said, “It does seem that Saudi Arabia is trying to legitimize its apparent current increase of production.”

The International Energy Agency in Paris noted “with disappointment” OPEC’s failure to take action. “Of course what really matters is actual supply, which should move in line with seasonally rising demand, and we urge key producers to respond accordingly,” IEA officials said. “Ongoing supply disruptions, as well as the fragile state of global economy, call for a prompt increase in supply on a competitive basis that will allow refiners to boost throughputs and meet rising seasonal demand. Otherwise, a further tightening in the market and potential increases in prices risk undermining economic recovery, which is in the interests neither of producers or consumers.”

Crude and product prices increased slightly June 7, ending two sessions of declines in the New York market, but remained essentially flat in anticipation of the OPEC meeting.

“OPEC uncertainty led West Texas Intermediate crude to bounce around yesterday, eventually closing flat [for] the day,” said analysts in the Houston office of Raymond James & Associates Inc. “The broader market closed the day flat, while energy stocks provided mixed results.”

Raymond James analysts reported, “Natural gas was flat yesterday as record June heat continues to support prices.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil traded higher yesterday, helped by a stronger euro, while the spread of the two main benchmarks, WTI and Brent, widened [to] $17.86/bbl, the widest level since February.” He said, “As the spread between Brent and WTI widens, more physical cargoes are likely to be diverted to Europe, instead of heading to the US—which could put Brent’s term structure under pressure.”

Zhang said, “Distillates outperformed gasoline yesterday in anticipation of a build in gasoline inventories and a decline in distillates inventories from the weekly Department of Energy report.”

US inventories
DOE’s Energy Information Administration said June 8 commercial inventories of US benchmark crudes fell by 4.8 million bbl to 369 million bbl in the week ended June 3, exceeding the Wall Street consensus for 1.4 million bbl decline. Gasoline stocks gained 2.2 million bbl to 214.5 million bbl in the same period, double the market’s expectations of a 1.1 million bbl increase. Inventories of both finished gasoline and blending components increased last week. Distillate fuel inventories were up 800,000 bbl to 140.9 million bbl, exceeding traders’ outlook for a 100,000 bbl increase.

Imports of crude into the US fell by 918,000 b/d to 8.6 million b/d last week. In the 4 weeks through June 3, crude imports averaged nearly 9 million b/d, down by 707,000 b/d from the comparable period in 2010. Total gasoline imports averaged 1.2 million b/d while imports of distillate fuel averaged 155,000 b/d.

The input of crude into US refineries increased by 261,000 b/d to 15.1 million b/d last week, with units operating at 87.2% of capacity. Gasoline production increased slightly to 9.4 million b/d. Distillate fuel production increased to 4.4 million b/d.

Meanwhile, officials of the European Central Bank are scheduled to meet June 9. “Any surprises from the ECB could cause volatile moves in the euro, which could have a knock-on effect on the oil market,” said Zhang.

Otherwise, he said, “There are limited economic data releases this week, and speculation that China will announce further tightening measures. For now, we see increasing risks of further downward corrections in oil prices on the back of softening economic data. We see a return of Libya’s crude supply as a potential catalyst to trigger a downside move in oil prices.”

Bernanke shakes markets
Federal Reserve System Chairman Ben Bernanke said in a speech June 7 the US economy is growing slower than he anticipated, but he still expects improvement in the last half of this year. His remarks immediately ended a rally in US stock markets and in the last minutes of trading triggered the fifth consecutive drop in major indexes.

Bernanke made no reference to a third “quantitative easing” program (QE3) to stimulate the US economy in his speech. “He did not make reference to tightening either, but investors betting that the failure of QE2 [which closes in June] could only be compensated by a doubling-it-up will be disappointed,” said Jakob. “Realistically, US banks have record amounts of cash assets ($658 billion more than at the start of the year, $485 billion more than a year ago); the Standard & Poor’s sectors apart from financials are about at or above the 2007 peaks; and if Brent was at $45/bbl when QE1 was launched, at $72/bbl when QE2 was decided, it is today at $117/bbl. The price of crude oil is a major problem for the US Fed and for its credibility.”

Jakob, an outspoken critic of Bernanke and his policies, said, “It was fascinating watching Bernanke yesterday spend most of his speech talking not about the state of the US economy but about supply and demand for oil, grains, and lumber. Most of his speech was spent as a lecture on commodities and on blaming China for the rise in commodity prices. But what it shows in our opinion is how much the Fed is on the defensive due to the rise of gasoline prices. As long as the Fed is seen as responsible for the higher gasoline prices, it will continue to lose credibility and political support.”

Launching QE3 with Brent priced near $117/bbl “would be extremely risky for the existence for the Fed,” Jakob said. “We have simple advice for…Bernanke: If you don’t like the oil prices where they are, just spend a couple of billion dollars selling oil futures; it is not very complicated.”

Energy prices
The July contract for benchmark US light, sweet crudes advanced 8¢ to $99.09/bbl June 7 on the New York Mercantile Exchange. The August contract gained 9¢ to $99.69/bbl. On the US spot market, WTI at Cushing, Okla., kept in step with the front-month futures price for crude, up 8¢ to $99.09/bbl.

Heating oil for July delivery increased 5.96¢ to $3.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 4.2¢ to $2.99/gal.

The July natural gas contract inched up 0.4¢ to $4.83/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 2¢ to $4.82/MMbtu.

In London, the July IPE contract for North Sea Brent crude climbed $2.30 to $116.78/bbl. Gas oil for June gained $4.50 to $954.50/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 57¢ to $110.66/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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