MARKET WATCH: Crude approaches $86/bbl in New York

Energy prices continued to escalate Aug. 11 as the front-month crude oil contract approached $86/bbl on the New York market.

“The stock market seesaw continued yesterday as the bulls came out on top,” said analysts in the Houston office of Raymond James & Associates Inc. The Dow Jones Industrial Average had fallen 634 points since Aug. 8, but modest improvement in unemployment data helped the Dow recapture some if its loss, up 423 points, or 3.9% at the end of trading. The Standard & Poor’s 500 Index enjoyed a healthy gain of 52 points, or 4.6%. Oil company stocks were up, with the Oil Service Index and the SIG Oil Exploration & Production Index (EPX) each gaining more than 5%.

Raymond James reported natural gas futures were up 4% in early trading Aug. 12 while crude was trading flat.

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, reported, “Oil prices have rallied $10/bbl off their lows as the market begins to price in a less apocalyptic macroeconomic scenario and to row back from the undershooting of prices below sustainable levels seen over the past week. Even with a reduction in gross domestic product growth rate expectations, the oil market is likely to stay in [a supply] deficit in 2011 and will require more [oil from the Organization of Petroleum Exporting Countries] to balance.”

The latest weekly data on US inventories were “very positive, with far more robust demand indications,” Horsnell said. “The US market is absorbing the release of [oil from the Strategic Petroleum Reserve] with ease, and indeed the surplus of crude and oil product inventories above their 5-year average is now at its lowest since 2008. Crude inventories have fallen further in the Midwest and at [the key storage and transfer point at] Cushing, Okla.”

OPEC production

Horsnell said, “A series of problems and disappointments on the supply side has produced a sharp slowdown in the pace of non-OPEC supply growth, providing the market with further insulation from the slowing of demand. Overall, we expect the call on OPEC crude to be 1.3 million b/d higher in the second half of this year than it was in the first half. The consensus of agency forecasts also sees the demand for OPEC crude running ahead of current output levels, providing further support for Brent prices above $100/bbl.”

Earlier this week, however, OPEC forecast global oil demand will increase by 1.21 million b/d this year to average 88.14 million b/d (OGJ Online, Aug. 9, 2011). It said economic worries along with high oil prices affected oil demand in the advanced economies of the Organization for Economic Cooperation and Development, leading to weaker-than-expected consumption during the summer driving season. And OPEC expects OECD oil demand to continue to contract after a temporary rebound last year.

OPEC has proven more adept at reducing production to raise oil prices than increasing production to balance low supply with increased global demand, said analysts at the Centre for Global Energy Studies (CGES), London. Its slow response to the surge in oil demand in the second half of 2010 as the world recovered from the broadest and deepest recession since the 1930s and its tardiness in replacing the production lost because of Libya’s civil war this year were key factors in propelling the price of North Sea Brent to an average $118/bbl in the second quarter of 2011 from an average $78/bbl in the third quarter of 2010, they said.

CGES analysts claim, “When the world economy was sliding into the abyss in the second half of 2008 and the first half of 2009, and oil demand was collapsing as a result, OPEC showed that it was capable of acting swiftly and decisively to curtail its production. However, the same cannot be said of the organization during the second half of 2010, when preemptive action was required to satisfy the market’s thirst for more oil and none was forthcoming, leaving the consequences of this inaction still with us in the form of large stock draws and concomitant declines in global stock cover and proving that OPEC is adept at slashing production to prop up oil prices but not at satisfying surging oil demand.”

Consequences of the 51% jump in crude prices from the third quarter of 2010 through the first half of this year “were—and, indeed, remain—serious” for the recovering global economy by “worsening the current accounts of large oil-importing countries, depreciating their currencies, and aggravating inflation everywhere.” CGES analysts said, “If OPEC is to fulfill the pledge it made at its inaugural conference in Baghdad in September 1960 ‘…to ensure the stabilization of prices by, among other means, the regulation of production,’ which it has signally failed over the years to do, it needs to improve its understanding of the call on its oil and react to it as and when required.”

They noted, “During the recession year 2009, oil demand declined worldwide by 1.1 million b/d at a time when non-OPEC supplies and OPEC’s NGL production increased by 1.9 million b/d, leading to a massive zero-stock-change drop in the call on OPEC oil of no less than 3 million b/d. Subtracting the previous year’s global inventory increase of 160,000 b/d boosts further the huge drop in the need for OPEC oil in 2009 to 3.18 million b/d.”  OPEC cut its 2009 production by 3.38 million b/d, leaving global stocks down 200,000 b/d.

Economic recovery around the globe last year caused oil demand to surge “an impressive 2.57 million b/d—the second largest annual increment since 1978 (the largest amounted to 3 million b/d in 2004), whereas non-OPEC supplies and OPEC’s NGLs rose by a combined 1.6 million b/d,” CGES analysts reported. “This resulted in a zero-stock change incremental call on OPEC of 970,000 b/d and because global oil stocks in the previous year were depleted by 200,000 b/d, subtracting this amount from the zero-stock-change call generated an incremental need for OPEC oil of 1.17 million b/d. Since OPEC’s output increased last year by a mere 530,000 b/d, global oil inventories declined by 640,000 b/d. Small wonder that dated Brent rose by 29% in 2010, given the cavernous gap between the need for additional oil from OPEC and the organization’s deficient response.”

However, they said, “This year has been a different proposition.” The zero-stock-change call on OPEC should be down 170,000 b/d, “yielding a positive incremental demand for OPEC oil of 470,000 b/d only because of last year’s heavy stock draw,” the analysts said. “By our reckoning, OPEC’s oil production in 2011 is likely to increase by no more than 280,000 b/d, resulting in another year of global inventory declines (down 190,000 b/d this time and the third year in a row in which oil stocks have fallen), which implies—given that oil demand is still rising—a continuing decrease in forward stock cover and another hefty year-on-year rise in the price of oil (of 41%).”

In other news, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, noted “A key advisory panel to the US Department of Energy recommends that shale gas (hydraulic) fracturing be closely regulated, but not forbidden. Full disclosure of chemicals used is advocated, with closer monitoring of both air and water impacts.”

He said, “While prompt markets [for UK natural gas] found support this week, we maintain our view that prices will generally remain weak relative to oil-indexation before 2014 while contractual overhangs are consumed, particularly as new LNG supply enters the market in the first half of 2012.”

Energy prices

The September contract for benchmark US light, sweet crudes climbed $2.83 to $85.72/bbl Aug. 11 on the New York Mercantile Exchange. The October contract gained $2.79 to $86.04/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.83 to $85.72/bbl.

Heating oil for September delivery increased 3.39¢ to $2.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 4.48¢ to $2.83/gal.

The September contract for natural gas bumped up 10.5¢ to $4.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.5¢ to $4.03/MMbtu.

In London, the September IPE contract for North Sea Brent increased $1.34 to $108.02/bbl. Gas oil for August was unchanged at $887.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes escalated by $2.09 to $103.29/bbl. OPEC offices in Vienna will be closed Aug. 15.

Contact Sam Fletcher at samf@ogjonline.com.

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