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MARKET WATCH: Crude oil prices increase, challenge $100/bbl in NY market

Crude oil prices increased Nov. 11 with the front-month contract temporarily hitting $99.20/bbl in intraday trading in New York on expectations of economic improvements within the Euro-zone.

“Oil moved higher as the market anticipated a new technocrat government to be formed in Italy,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The market was also helped by a better-than-expected reading of the US consumer confidence.”

Indeed, analysts in the Houston office of Raymond James & Associates Inc. reported Nov. 14, “Over the weekend [Italian] Prime Minister Silvio Berlusconi followed through on his commitment to step down from office after the parliament passed parts of a $62.6 billion austerity package aimed at restoring investor confidence and taming financing. In order to bring more confidence to the markets, Italy's president appointed Mario Monti to take over as prime minister. However, the markets were not satisfied as yields hit a record during this morning's debt auction.”

As Euro-zone members struggle to gain control of sovereign debt, the US Congressional “super committee” apparently has made no progress toward its goal of carving $1.2 trillion from the federal deficit by the Nov. 23 deadline. Raymond James analysts wondered, “Will Congress continue to kick the can down the road, or will the market be the ultimate decision-maker?”

In energy markets, Zhang said, “Gasoline continued to underperform the broad market, driving the crack to the lowest level since 2008. Meanwhile, term structures for West Texas Intermediate strengthened further, while Brent held firm in steep backwardation.”

Net gains in crude prices last week included $4.73/bbl for WTI and $2.19/bbl for Brent, primarily because of “geopolitical concerns over the International Atomic Energy Agency’s report on Iran’s nuclear program and a hefty decline in US commercial oil inventories.” Zhang noted, “Needless to say, the physical oil market remained very tight, which holds the oil price up and differentiates oil from some other industrial commodities.”

Analysts at the Centre for Global Energy Studies (CGES), London, said, “Although the market fundamentals remain tight, the oil market is unlikely to remain unaffected by the financial meltdown in Italy and the sharp slowdown in the Euro-zone’s growth prospects.” They noted, “The associated threats are many, but of particular concern is the growing possibility of another banking crisis in Europe and beyond that would severely damage the outlook for global economic growth and oil demand.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “Once again, oil prices are responding more to geopolitical tensions than the accident waiting to happen that is the European debt crisis. As bond yields in Italy soared to what many believed to be unsustainable levels of 7% and above, and the new Greek coalition government flounders as it tries to pass austerity measures that will allow the next tranche of aid to be paid, oil prices have remained strong. North Sea Brent futures, which hit a high of $116.48/bbl on Nov. 8, currently stand at $114/bbl basis the front-month December contract; while WTI futures on the New York Mercantile Exchange are [above] $98/bbl. With Iran defiantly denying it has any intention to develop nuclear weapons, despite the findings of a report by the IAEA, regional tensions in the Middle East remain high.”

KBC analysts said, “That has kept crude prices on the boil despite a real risk that Italy would join the…ranks of Ireland, Portugal, and Greece in needing a bailout. The prospect that Italy, recognized as one of the “too big to fail” economies, might buckle under its €2 trillion debt has plunged the Euro-zone debt crisis to new depths. In previous weeks, we would likely have seen [Brent] oil prices drop back down to $100/bbl on the financial mayhem that this has caused, but recent economic indicators from the US and China have been less gloomy than expected, and news that Italian premier Silvio Berlusconi would quit has helped relieve some of the panic.”

Nevertheless, they said, “It is the tensions in the Middle East that are rattling the market, rightly or wrongly. [Recent] indiscreet remarks about Israeli leader Benyamin Netanyahu passed between US President Barack Obama and French President Nicholas Sarkozy provided a reminder of the underlying tensions between the world’s superpowers and Israel. The turmoil in Syria has done nothing to cool temperatures in the region. Syria has in the past been a staunch ally of Tehran, not least during its conflict with Iraq.”

International action against Syria is “taking its toll on the oil producer. Anglo-Dutch major Shell and Total of France have slashed their oil production in the country because sanctions make exports impossible,” KBC analysts noted. Now the European Union is threatening fresh sanctions on Iran, “which might be implemented within weeks,” KBC analysts said.

Energy prices

For the third consecutive session, the December and January contracts for benchmark US light, sweet crudes increased by like amounts, up $1.21 each to closings of $98.99/bbl and $98,89/bbl, respectively, Nov. 11 on NYMEX. On the US spot market, WTI at Cushing increased by the same amount, of course, matching the December futures contract’s $98.99/bbl close.

Heating oil for December delivery continued climbing, up 2.05¢ to $3.17/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continued its decline, down 3.3¢ to $2.60/gal.

Natural gas prices also continued falling, with the December futures contract down 6.5¢ to $3.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 18.1¢ to $3.28/MMbtu.

In London, the December IPE contract for North Sea Brent rose 45¢ to $114.16/bbl. The new front-month December contract for gas oil jumped by $20.75 to $999.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.34 to $113.01/bbl. So far this year, OPEC’s basket price has averaged $107.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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