MARKET WATCH: Crude oil posts modest gains in New York market

Crude oil prices advanced Aug. 22 in the New York market, more on indications of strengthening European markets than from bullish sentiment over the likely fall of Libyan dictator Moammar Gadhafi.

“The spread between West Texas Intermediate and Brent crude, which hit a record high on Aug. 19, narrowed as WTI gained 2% on the last day of trading for the September contract and Brent fell modestly on prospects for resolution in Libya,” said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, natural gas fell 1% on mild forecasts for the Northeast and Midwest. Taking the cue from gas and Brent, energy stocks underperformed, with the Oil Service Index and [SIG Oil Exploration & Production Index] EPX falling 1% and 2%, respectively. With a fairly light economic calendar this week, market players remain in a ‘wait and see’ mode ahead of [Federal Reserve System Chairman Ben Bernanke’s speech] set for Aug. 26.”

Meanwhile, broader market futures, crude, and gas prices were higher in early trading Aug. 23. Olivier Jakob at Petromatrix in Zug, Switzerland, noted, “The fall of Tripoli has brought for now only a small reduction in the Brent premium to WTI, but through a flat price increase in WTI rather than a price fall in Brent. For now, we remain in a trading pattern where ICE Gas oil or ICE Brent is not allowed to fall below their 200-day moving average.”

Meanwhile, Saif al-Islam Gadhafi, the dictator’s son, has appeared on state television dispelling reports of his being captured by the rebels. “This will bring down some of the euphoria,” said Jakob. “However, we need to keep in mind that the fall of Tripoli was not expected for this past weekend, and if crude prices have been retreating in August, it was not because of positive expectations on the restart of crude oil exports from Libya but on negative expectations about oil demand.”

Jakob said, “Product prices are still at an elevated level that will not help product demand, and the downward revisions to oil demand projections are starting. Yesterday JP Morgan revised its oil demand growth expectation for 2012 by 500,000 b/d, and we still expect that the International Energy Agency, Paris, will have to make at least the same magnitude of revisions to its demand estimates. On the basis of those demand revisions, there is no need of Libyan crude oil to have a global stock build in 2012; Libyan crude oil would come on top of it. Goldman Sachs has delayed by 3 months their estimate of the Organization of Petroleum Exporting Countries running out of spare capacity due to Libya; we do not think that they have yet made the adjustment for upcoming oil demand revisions.”

Natural gas outlook

In other news, Raymond James analysts said, “As much as we would like to get bullish on natural gas, the facts tell us that we still have a gas-supply problem in the US that is likely to last at least through 2012. Despite year-over-year gas supply growth rates of around 5 bcfd this year, consensus expectations are that US gas supply growth should slow down sharply in 2012 to a full-year growth of about 2 bcfd year-over-year.”

They noted “many myths” as to why gas-supply growth rates “must” slow, including: “The natural rig count is…to fall off a cliff after leases expire; The decline curve treadmill will eventually catch up; The migration of rigs to liquids plays will lead to declines in natural gas production.”

Raymond James analysts said, “The gas bulls have been leaning fruitlessly on these reasons for the past several years. When one examines the evidence, none of these myths seem to hold water.”

They reported, “Our reality suggests that even if there is a modest decline in the gas rig count (reasonably, less than a 10% drop) in 2012, there are several drivers that should more than offset this reduction in drilling activity. In fact, we believe that gas supply growth may even accelerate over the next year due to the following:

• Drilling and completion efficiencies should continue to move higher.

• Associated gas from liquids rich oil plays should continue to increase.

• A hefty backlog of uncompleted wells still waiting behind pipe.

Raymond James analysts said, “To be conservative, we are modeling US gas supply growth in 2012 of only 4 bcfd. Unfortunately, this is roughly twice as high as consensus expectations and is likely to keep a lid on US natural gas prices in the sub-$4.50 range for the next year.”

Energy prices

The expiring September contract for benchmark US sweet, light crudes increased by $1.86 to $84.12/bbl Aug. 22 on the New York Mercantile Exchange. The October contract gained $2.01 to $84.42/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.86 to $84.12/bbl, in step with the September futures contract.

Heating oil for September delivery inched up 0.62¢ to $2.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.61¢ to $2.84/gal.

The September contract for natural gas dropped 5.1¢ to $3.89/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 3.1¢ to $3.98/MMbtu.

In London, the October IPE contract for North Sea Brent decreased 26¢ to $108.36/bbl.

Gas oil for September was down $2.50 to $915.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes rose 48¢ to $103.84/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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