MARKET WATCH: Crude prices slip lower; Gadhafi faces defeat

Crude prices slipped lower Aug. 19, but other energy commodities rose from a steep fall in the previous session despite uncertainty in the European debt markets and fears of a global recession that triggered the fourth consecutive week of losses for Standard & Poor's 500 Index.

In Houston, analysts with Raymond James & Associates Inc. said, “Improved prospects for the end to the conflict in Libya could help support equities today, but the potential for oil production to resume could weigh on crude prices.”

Raymond James analysts reported, “It became clear over the weekend that the [Moammar] Gadhafi regime in Libya is at a point where its military defeat is inevitable. As of this morning, rebel forces are in control of most of Tripoli, with a fierce battle raging near Gadhafi's compound. (It's unclear where Gadhafi is.) That said, given how fluid the tactical situation is, it is premature to say (as some in the media are) that the end of the war is imminent. Given that the regime's most loyal forces (including foreign mercenaries) feel that they have little left to lose, the prospect of protracted house-to-house fighting cannot be ignored, even if Gadhafi and his sons are no longer in direct control. Unlike Baghdad in 2003, there are no Western troops on the ground to act as a restraining factor between the various tribes and factions.”

From the oil market's standpoint, Raymond James analysts said, “The worst-case scenario would be a repeat of Saddam Hussein's withdrawal from Kuwait in 1991, when the oil fields were set on fire. Deliberate sabotage by a cornered Gadhafi is possible, although much of the oil infrastructure is already under rebel control. Even when Tripoli is under the full control of the transitional government, that does not mean that the international oil companies will come back immediately. The overall security situation must stabilize for operators to risk sending back employees. There will also need to be an understanding with the new authorities on fiscal terms. Finally, after the companies come back, it will take time—about 6 months, based on Iraq's experience—to restore [Libyan] production to pre-war levels (1.8 million b/d).”

Years later, Iraq still is not back to its prewar production level, however. James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “We don’t yet know the damage caused to Libya’s oil facility. It could more than a year for Libya’s oil production to come back to the preconflict level. Furthermore, it will also take some time for foreign oil company to move back into Libya. Nevertheless, the immediate sentiment is bearish, further weighing on oil prices with the backdrop of a decelerating economy in the US and Europe.”

Raymond James officials warned, “Even under the most favorable security conditions, do not expect a post-Gadhafi Libya to exhibit significant organic growth in oil output. Even Iraq, which had previously been cut off from world-class oil technology for over 3 decades, is currently showing only modest growth. By contrast, Libya has been wide-open to European operators since the 1990s and to US operators since 2004. Thus, any claims that Libya is a treasure trove for new discoveries need to be taken with a big grain of salt.”

The S&P factor

Olivier Jakob at Petromatrix in Zug, Switzerland, observed, “The S&P 500 lost 4.69% during the week and is [down] 13.06% for the month and 10.66% for the year-to-date. Technically, the picture is very worrying on the S&P 500. It imperatively needs to maintain 1,121 on a closing basis (the 50% Fibonacci [formula] from the highs of 2008 to the lows of 2009). If that line of support is broken and confirmed, then technically we will have to target the lows of 2010 (1,010 on the S&P 500). Such a level looks low compared to the recent highs (the NASDAQ was priced in the first half of 2011 at the highs of 2007), but it is nothing more than the great unwind of the artificial QE2-sponsored surge [the second phase of the Federal Reserve Bank's quantitative easing program that Jakob and other critics claim failed to stimulate the US economy].”

He said, “If ‘the market is always right,’ then it shows that the artificial asset support provided by the US Federal Reserve was, as we expected, a big waste. QE2 has never achieved what it was supposed to do. [Fed Chairman] Ben Bernanke, however, was gloating that it did materialize in a stronger equity market, and the recent turn of the market will increase the pressure on his shoulders this week [Aug. 26] at Jackson Hole, which will be a pivotal input for the next 6 months. Many large Wall Street firms have been reducing their gross domestic product forecasts last week with great publicity, and this will increase the pressure on the Bernanke to leave open the possibility of a QE3 during his speech at Jackson Hole (Goldman Sachs revised down further its US GDP forecast on [Aug. 19], to 1% for the third quarter and 1.5% for the fourth quarter).”

The Fed’s problem is that gains in the S&P 500 have proven “transitory” compared with the increase in commodity prices, Jakob said. Compared with a year ago, the S&P 500 is 7% higher but prices of gasoline and heating oil are 54% higher. “QE2 launched a speculative frenzy in commodities, which was then followed by an increased risk premium due to the events and supply disruptions in the Middle East and North Africa regions. Furthermore, a gigantic change in the petroleum structure with Brent and Light Louisiana Sweet crude moving to extraordinary premiums to West Texas Intermediate has resulted in product prices (and the consumer pays for products, not for WTI) still being priced at extremely high levels. With US consumer confidence at record low, if Bernanke fuels the same speculative frenzy in commodities [as] a year ago,  then in our opinion things could turn real ugly both for the global economy and for the global social stability,” Jakob said.

In other news, Jakob said, “The search for something called ‘safe haven’ [for investment] is so great that interest is starting to grow on the Singapore dollar. If Bernanke does not hint at some immediate plan to further debase the US dollar, we will view the dollar safer than the euro given that Europe still has to formalize the Greek rescue plan, and given the side-deals that Greece was trying to do with Finland last week, we have to be careful in being too enthusiastic about the European plan for Greece.”

Last week the Brent premium to WTI widened to new highs. “In our opinion, there is clearly more to the Brent-WTI spread than the crude oil fundamentals of the North Sea and of Cushing, Okla. Cushing stocks are currently below their recent highs and the contango in WTI has been seriously reduced going into the expiry of the September contract (Aug. 23). Premiums for West African and Russian crudes are strong, but the main input of the weekend has been the fall of Tripoli and by default the fall of the Gadhafi regime. It does not resolve all issues for Libya, but it does start to allow putting some time-stamps for some resumption of crude oil exports from Libya,” said Jakob.

Energy prices

The September contract for benchmark US light, sweet crudes dipped 12¢ to $82.26/bbl Aug. 19 on the New York Mercantile Exchange. The October contract slipped 10¢ to $82.41/bbl. On the US spot market, WTI at Cushing was down 12¢ to $82.26/bbl.

Heating oil for September delivery increased 2.97¢ to $2.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 5.8¢ to $2.84/gal.

The September contract for natural gas gained 4.8¢ to $3.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2.6¢ to $4.01/MMbtu.

In London, the October IPE contract for North Sea Brent climbed by $1.63 to $108.62/bbl. Gas oil for September advanced $6.50 to $918/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes fell $2.06 to $105.42/bbl. So far this year, OPEC’s basket price has averaged $107.25/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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