After falling heavily through four of five trading sessions last week, energy prices rebound slightly Sept. 26 on renewed hope the Euro-zone may yet resolve its sovereign debt crisis.
“On the heels of the worst week for stocks since October 2008, Europe's will to avert a full-blown debt crisis began to show some credible signs of life,” said analysts in the Houston office of Raymond James & Associates Inc. However, they said, “Continued fears of global contraction weighed on oil demand and as such crude drifted only marginally higher with low trading volumes.”
Natural gas prices rose 2.1% with the broader markets' strong showing. The SIG Oil Exploration & Production Index (EPX) gained 4.1% while the Oil Service Index increased 3.2%. In early trading Sept. 27, Raymond James reported, “The market and commodities are on fire following slightly more positive sentiment in Europe, as both Asian and European stocks are trading well into positive territory this morning.”
Markets rallied as Greece’s finance minister announced that country will get the next part of its bailout loan package in time to avoid default on its sovereign debt.
However, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Oil markets are being hit by economic worries, the potential return of Libyan oil exports, and financial factors such as a weaker US equity market and a stronger US dollar. We believe the most dangerous threat to oil is if world growth falls below 3% in 2012.”
Slower growth expectations will weigh on refinery margins. However, Sieminski said, “Refinery closures and a slower pace of capacity additions in 2012 mean the global refinery balance is unlikely to develop a significant surplus on par with 2009 levels.”
He said, “We see US natural gas prices approaching a low point in the fourth quarter of this year, but the risk of economic turmoil and continuing supply strength could extend this period of weakness into 2012.”
James Zhang at Standard New York Securities Inc., the Standard Bank Group, acknowledged, “A further sharp fall in oil prices was arrested yesterday on hope that the Euro-zone would significantly bolster the European Financial Stability Facility.”
He said, “The oil market continues to follow the broad market sentiment, while oil market supply and demand fundamentals take the backstage role. We expect it will remain this way as the Euro-zone debt crisis lingers. Although the market tries to gear towards bearish positions, uncertainties over the next policy move keep market participants wary of holding on to their bearish convictions.”
Zhang pointed out, “In the North Sea, the Buzzard field experienced further problems last week, which has so far caused seven October Forties cargoes being deferred and one cancelled. Consequently, the front-end of the Brent crude curve remained firm despite the sell-off in flat prices. That said, the differentials to dated Brent for most physical crude have come off their recent highs as a sign of improved supply situation. Poor refining margins have also put pressure on price differentials as refineries cut back their run rates. Confirming the tough market conditions for refiners, Eni SPA announced yesterday that it will temporarily shut the Venice refinery due to poor margins.”
Despite the higher price of crude in the New York market, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “We are not sure of what it says about the crude oil supply and demand given how close it traded to the variations in the Standard & Poor’s 500 [and] the Dow Jones Industrial Average. West Texas Intermediate did provide some diversification for about 20 minutes yesterday before the close but that was about it.”
He said, “Now the challenge will be to find some follow-through buying. The problem with those ‘leaked’ reports of European master plans is that they are an almost daily occurrence given that they usually offer no follow-through action. The headline-reading algorithmic machines might be buying the Dow futures on a ‘leaked’ European master plan, but the bond yields on Greece or Italy have for now not been moving significantly lower.”
Canadian concerns
When the front-month futures price closed below $80/bbl on Sept. 23, it triggered concerns “that oil producers might cut back on production if the price falls any further,” said Zhang. Since producers of Canadian oil sands have the highest costs in the oil industry, he said, “The rather depressed WTI price, and in particular relative to Brent, has seen profit margins for Canadian producers largely squeezed, as some of their production has had to be sold at a further discount to WTI.”
Standard New York Securities figures the replacement cost for Canadian oil sand producers at $60-80/bbl, “which makes further investment in the sector rather uninspiring to the current spot price level.” However, Zhang said, “For those facilities already in production, their operational cost ranges only between $20-35/bbl, which means that those facilities are likely to continue producing, as long as the oil price stays above $35/bbl.”
Canadian oil production increased during the last recession that pushed the WTI price close to $30/bbl, said Zhang. “In fact, the total non-OPEC oil supply grew throughout the last downturn,” he said. “Obviously, non-OPEC supply growth has been supported by a rather sharp price rebound from the lows in early 2009. Should the oil price have stayed significantly below its replacement cost level for a prolonged period of time, we could have had a chronic decline in non-OPEC supply as capital investment would have been slowed down accordingly.”
Despite the recent price fall, Zhang sees the long-term price expectation to be “firmly anchored.” He said, “The 5-year forward swap prices in both WTI and Brent remained around $90/bbl, which is still broadly supportive for most major oil exploration and production projects.”
Nonetheless, if the US or the Euro-zone falls into another recession in the next 6-9 months, Zhang said, “The shift in oil supply will continue to be driven by the Organization of Petroleum Exporting Countries. In fact, several OPEC officials have been quoted recently, saying that OPEC would consider a production cut as the Libya supply returns to the international market and if the oil price falls further. Historically, OPEC has had more success in defending oil prices while the global economy was strong, and proved to be less effective during the 2001 and 2008 recessions.”
Energy prices
The November contract for benchmark US sweet, light crudes traded at $77.11-81.36/bbl Sept. 26 before closing at $80.24/bbl, up 39¢ for the day on the New York Mercantile Exchange. The December contract recovered 36¢ to $80.48/bbl. On the US spot market, WTI at Cushing, Okla., was up 39¢ to $80.24/bbl.
Heating oil for October delivery dipped 0.43¢ to $2.79/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.47¢ to $2.57/gal.
The October contract for natural gas jumped 8.1¢ to $3.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to climb, up 6.8¢ to $3.81/MMbtu.
In London, the November IPE contract for North Sea Brent slipped 3¢ to $103.94/bbl. Gas oil for October dropped $8.50 to $890.50/tonne.
The average price for OPEC’s basket of 12 benchmark crudes fell $2.56 to $101.81/bbl.
Contact Sam Fletcher at [email protected].
