MARKET WATCH: Crude oil price fluctuates with outlook for resolving EU crisis

There was virtually no reaction in oil markets Oct. 20 to news of the death of Libyan dictator Moammar Gadhafi, with the price of crude moderately lower in New York as traders focused on the continuing feud between Germany and France over the Euro-zone debt crisis, signaling greater interest in future demand over future supply of oil.

“Crude was flat while natural gas got a boost from a bullish inventory report and finished up 1.2%,” said analysts in the Houston office of Raymond James & Associates Inc. In early trading Oct. 21, however, crude prices were up while gas prices were down.

Raymond James analysts said, “All eyes seem fixated on the [German Chancellor Angela] Merkel-[French President Nicolas] Sarkozy dance and headlines centered on the continuing Euro-zone debt crisis. Yesterday, a report that the German chancellor and French president once again couldn't agree over bailout terms weighed on the markets.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The flat price of oil will continue to trade purely on the latest European Union rumor or headline, but with the added difficulty of a strong volatility in the Brent-West Texas Intermediate spread. The EU crisis continues, and funny enough, each time an announced meeting does not come up with a resolution, the market rallies because the next meeting will surely bring a resolution.”

Merkel and Sarkozy are to meet Oct. 22 in Brussels to prepare for the Oct. 23 summit meeting of European leaders to discuss how the European Financial Stability Facility (EFSF) will be utilized. However, Raymond James analysts said, “Confidence that any significant decision will be reached remains weak.”

Any agreement coming out of the weekend discussions will not be enacted until a second EU summit meeting Oct. 26.

At the end of the weekend meeting of EU officials, Jakob said, “We are likely to receive a strong commitment from France and Germany to solve the crisis, and never mind if this something that was already said months ago. We now have to wait [until Oct. 26] to find out what sort of financial engineering France and Germany agree to.”

He said, “With the outlook for European gross domestic products getting slashed, it will not get better as countries will have to make further budgetary cuts to maintain their debt-to-GDP ratios and their AAA [credit] ratings. Germany is cutting its 2012 GDP outlook by half, and if France is not doing the same for now it is only because they want to find the best timing for it.”

Jakob said, “Because of the noise out of the EU and the correlations between oil, Standard & Poor’s 500 Index, and the euro-dollar [valuations], it is very difficult to make a call on flat price. The relative values in products continue to price a greater divergence between the light ends and the middle distillates. The naphtha crack continues to plunge lower and brings down with it the gasoline crack; the reformulated blend stock for oxygenate blending (RBOB) to Light Louisiana Sweet crude spread is plunging back into negative territory. Diesel premiums in Europe continue, however, to surge and are closing in to premiums paid for jet fuel. With it, the ICE gas oil backwardation is regaining some of the ground lost early in the week. Brent was also regaining some of its backwardation yesterday, but unlike distillates, it is difficult to make a relation between the trend in the physical premiums and the Brent time spreads given that crude oil physical premiums continue to trend lower due to more oil coming out of Libya and refineries not running (hence supporting the diesel premiums).”

The Gadhafi factor

National Transitional Council officials yesterday reported Gadhafi was killed as revolutionary forces took Sirte, his hometown and one of the last pockets of resistance by regime loyalists (OGJ Online, Oct. 20, 2011).

Gadhafi’s demise “will have little immediate impact on flat prices or the Brent term structure,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group. “Assuming a relatively stable political situation in Libya, we expect around 200,000-300,000 b/d of oil production to have been restored by yearend, then a gradual increase next year taking Libyan production levels to 1 million b/d by the end of 2012. It could take well into 2013 and beyond, before oil production is restored to pre-conflict levels.”

Energy markets had “already factored-in such a scenario,” said Daniel Yergin, chairman of IHS CERA. “The writing had been on the wall for some time in this conflict, and Libyan oil production had already started to recover from the near total disruption that occurred at the height of the civil war.”

Gadhafi’s death “will certainly send a collective signal that the next phase in Libya’s national recovery can now begin,” he said. “But in terms of physical oil production there is not much that can be done in the short term that is not already being done.”

The finish of the Libyan dictator “may slightly speed up the timetable for improvements in governance, but we believe that oil field and port repairs will still take considerable time and effort. This should sustain Brent's premium to WTI,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC.

Gadhafi’s rise and fall “mark two pivotal points in the history of oil,” said Yergin. “After taking power in Libya in 1969, a 29-year-old Gadhafi initiated radical moves—a shift in power from international companies to oil exporting countries—that set the stage to the oil crises of the 1970s that thrust oil to the center of world politics. Gadhafi’s death comes at another signal moment when the world is moving into a new oil era marked by the peaking of oil demand in the West and the shift toward the fast growth in oil use in emerging markets.”

Energy prices

The November contract for benchmark US light, sweet crudes declined 81¢ to $85.30/bbl Oct. 20 on the New York Mercantile Exchange. The December contract dipped 22¢ to $86.07/bbl On the US spot market, WTI at Cushing, Okla., was down 81¢ to $85.30/bbl.

However, heating oil for November delivery increased 4.89¢ to $3.03/gal on NYMEX. RBOB for the same month inched up 0.4¢ to $2.68/gal.

The November contract for natural gas gained 4.4¢ to $3.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 2.8¢, also closing at a rounded $3.63/MMbtu

In London, the December IPE contract for North Sea Brent climbed $1.37 to $109.76/bbl. Gas oil for November dropped $12.25 to $936/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.46 to $107.19/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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