Crude oil prices declined Nov. 14, ending a two-session rally in which crude failed to break the $100/bbl barrier or to hang onto intraday highs above $99/bbl on the New York market.
“Crude couldn't dodge the euro concerns as West Texas Intermediate retreated a modest 0.8% still closing above the $98/bbl mark,” said analysts in the Houston office of Raymond James & Associates Inc. Commodity prices were lower in early trading Nov. 15.
Weakness in both the equity and commodity markets were “once again driven by European debt concerns as an Italian 5-year bond auction fetched 6.29%, up from 5.32% last month,” Raymond James analysts reported.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil weakened yesterday as Euro-zone industrial production fell at the fastest pace since the second quarter of 2009.”
He said, “Gasoline continued to underperform the broad market, driving the crack to the lowest level since 2008. By contrast, middle-distillate crack rallied further, and surpassed $20/bbl.” Zhang said, “Term structures for WTI and Brent fell sharply, but remained in rather steep backwardation.”
Zhang said, “The relief over Italy with an incoming technocrat government appears to be rather short-lived, as Italy’s 10-year government bond yield hit 7% again today after a sharp fall towards the end of last week. However, German and French gross domestic product data for the third quarter were revised higher to 0.5% and 0.4% respectively, which has brought the overall Euro-zone third quarter GDP growth to 0.2% quarter-over-quarter. The bigger question however, is whether the Euro-zone will or will not slip into recession during the current quarter.”
GDP numbers for Germany and France provided “some support” for the oil market. “However, the Euro-zone debt crisis is far from over and maintains the ability to haunt the market again,” said Zhang. “More importantly, the recession risk in the Euro-zone continues to grow. We expect volatility to remain elevated, as the oil price is torn between tight fundamentals and uncertainties over the macro-environment.”
Uncertainties for refiners
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The reformulated stock for oxygenate blending (RBOB) crack to Brent continues to plunge deeper into negative territory. The gasoline crack is trying to shut down refineries, but the heating oil crack has to compensate to maintain an incentive for refineries to run.”
He said, “If the distillates crack is able to maintain some refinery runs, then the unwanted gasoline will need to go somewhere and most likely will be pushed into storage. Therefore, RBOB is starting to move back to a contango. Building stocks of gasoline will then translate into less future demand for crude oil (when we exit the winter); hence the crude oil backwardation is starting to ease. If the distillates crack weakens, then the refinery run cuts will occur sooner. One way or another, the current relative values will create a problem for refinery margins over the coming months.”
Jakob expects the Brent premium to WTI to narrow next year “on the back of the resumption of Libyan crude oil exports and the closure of US East Coast refineries.” Moreover, he said, “We now have to add a relative value structure that is not bullish in our opinion for future crude oil refinery runs in the US. The Brent premium to WTI continues to narrow and as the trend increases, it is now difficult to find any sell-side analyst not calling for a narrowing of that spread.”
ConocoPhillips will lay off the entire staff of its at its 188,670 b/d Trainer, Pa., refinery in January. “The Sunoco refineries are next in line for terminal closure, and the latest relative values will not help,” Jakob said. PBF Energy Co LLC, owner of refineries on the East Coast, is planning an initial public offering.
Meanwhile, Jakob reported, “The latest [fuel] deliveries numbers out of Italy (for October) shows the same trend as France or Germany; deliveries of gasoline in Italy were down 5.4% vs. October 2010 while diesel deliveries were down 1.3%.
Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, “The Brent-WTI crude oil price spread has declined from a high of $29/bbl to $14/bbl over the past 4 weeks due to a combination of declining Midwest oil inventories, expectations of increased take-away capacity (rail) from the Bakken to the Gulf Coast, and the return of Libyan oil supply. This has caused Midwest refining margins to fall 50% since Oct. 14 and refining stocks to decline 4% over the same period.”
However, Rousseau reported, “Our modeling suggests that Midwest oil inventories will increase sharply in the first half of 2012 due to higher production in the Bakken and Canada, which should widen the Brent-WTI spread, a positive for Midwest refiners. But, these gains are likely to be short lived as we expect the Seaway pipeline to be reversed in the second half of 2012, lowering Midwest oil inventories.”
He said, “The next major inflection point for the Brent-WTI oil spread is the Seaway pipeline, and we expect ConocoPhillips to sell its 50% interest by yearend and for the pipeline to be reversed in the second half of 2012.” Rousseau said, “The net result is that we expect the bottleneck of oil supply in the Midwest to be ‘solved’ by mid-2013, and we are decreasing our second half 2013 refining margin forecasts, accordingly.”
Seaway is a 30-in., 500-mile pipeline that currently transports crude from Freeport on the Texas Gulf Coast to the glutted storage hub in Cushing, Okla. Enterprise Products Partners LP, which owns 50% and is operator of the 350,000 b/d capacity pipeline, is negotiating to buy ConocoPhillips's 50% interest. ConocoPhillips is not interested in the proposed reversal of that pipeline since its Midwest refineries benefit from depressed oil prices caused by the Cushing glut. But the company now wants to sell its downstream assets.
Energy prices
The December contract for benchmark US sweet, light crudes traded at $97.19-99.69/bbl before closing at $98.14/bbl Nov. 14 on the New York Mercantile Exchange, down 85¢ for the day. The January contract dropped 67¢ to $98.22/bbl. On the US spot market, WTI at Cushing was down 85¢ to $98.14/bbl.
Heating oil for December delivery slipped 0.94¢ to $3.16/gal on NYMEX. RBOB for the same month declined 6.85¢ to $2.54/gal.
The December natural gas contract fell 12.6¢ to $3.46/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 11.9¢ to $3.16/MMbtu.
In London, the December IPE contract for North Sea Brent lost $2.27 to $111.89/bbl. Gas oil for December was unchanged at $999.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes continued its almost daily swings, down 32¢ to $112.69/bbl.
Contact Sam Fletcher at [email protected].
