Crude oil prices rose Nov. 28 tracking a surge in equities and helped by a weaker US dollar to regain much of the loss at the end of last week. Front-month crude was up 1.5% in the New York futures market, but the expiring December natural gas contract fell 5%.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Gasoline was the best performer across the oil complex on hopes for a strong holiday demand, while middle-distillates were lagging. Refining margins continued to weaken, driven by the crude rally. The Brent structure jumped, pushing the backwardation as steep as early October, which clearly signals that the oil market is very sensitive to any supply disruptions at this stage.”
However, Marc Ground, another Standard Bank Group analyst, reported, “The past week’s moves indicate some unease creeping into the oil market, which up until now has enjoyed relatively strong support as concerns over a US recession eased and the focus shifted to the market’s tight fundamentals.”
‘Black Friday’ and the economy
Some credited the rebound in energy prices to the strong turnout of US shoppers Nov. 25 at traditional “Black Friday” sales the day after Thanksgiving, which officially mark the start of the annual gift-buying rush with Christmas less than a month away.
However, Olivier Jakob at Petromatrix in Zug, Switzerland, observed skeptically, “We are not sure what a mob of shoppers fighting each other to buy some ultra-cheap towels made in China really says about the state of the US economy.”
He acknowledged a Nov. 28 surge in purchases of stocks of companies listed in Standard & Poor’s 500 Index. “But we need to note that all the gains were made in the futures market before the open of the New York Stock Exchange combined with an unusual surge in the last 10 min. The trading action during the normal NYSE open hours was actually poor,” he pointed out.
Moreover, Fitch Ratings Ltd. later put its US AAA rating on negative outlook, reflecting the rating service’s declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path and secure the sovereign rating “will be forthcoming.” Fitch officials cited the recent failure of the Congressional Joint Select Committee on Deficit Reduction—the “super committee”—to cut the federal budget deficit by at least $1.2 trillion over the next 10 years.
“According to French newspapers, S&P could do the same for France very soon,” Jakob reported. Meanwhile, he said Moody's Investors Service is expected to downgrade the ratings of 87 European banks. Such moves would be bad for global economic recovery and would likely reduced energy demand in the near future.
Jakob said, “Europe is still working on a plan to rescue the previous rescue plan which was to rescue the previous plan. Even if it does manage to prevent a break-up of Europe (which is not a given), it will not change the fact that economic growth in Europe will be anemic next year. The Organization for Economic Cooperation and Development expects France to have only 0.3% of GDP growth next year (compared with 1.6% in 2011), and yesterday the French unemployment number came out at the highest absolute level in 12 years. Under those conditions it will be harder and harder for France to keep its AAA rating.”
Zhang said, “The oil market is currently very sensitive to supply disruptions. This is because the very steep backwardation in the oil market and poor refining margins have driven oil refiners to keep their stocks at a minimum and take a hand-to-mouth approach to crude purchases. Even relatively small disruptions could cause spikes in flat prices and term structures. The jump in the Brent structure was partly driven by Sudan blocking South Sudan’s crude. A 600,000 bbl cargo was delayed, and another 1 million bbl cargo might be also at risk. This may appear a relatively small amount, but marginal barrels are increasingly critical in the current tight market.”
He said, “Risk appetite is likely to stay fairly weak into yearend. We expect some relief rallies as the market shifts its focus from the Euro-zone to the US. However, the Euro-zone debt crisis is likely to cap upside in oil prices, while geopolitical risk should provide a firm price floor.”
The French push for a ban on Iran crude oil is facing resistance, “and it seems…we will have to wait for the Dec. 9 European Council meeting” for further development, Jakob said.
In the interim, the Russian aircraft carrier Admiral Kuznetsov is sailing from the Barents Sea towards Syria. “The trip was scheduled before the recent incidents, but it reminds us that Russia was set to refurbish the Syrian port of Tartus to accommodate the larger Russian warships,” Jakob noted. “Russia is not helping the United Nations to impose sanctions on Syria and given that this country is supposed to be the home for an important Russian navy base in the Mediterranean, the stakes are a bit different than in Libya. On the other side of the planet, China will carry out the second sea trial of its refitted Admiral Kuznetsov class aircraft carrier. The US currently has only one aircraft carrier in the Middle East-North Africa region (the Stennis in the Arabian Sea).”
The January contract for benchmark US sweet, light crudes traded at $97.13-100.74/bbl Nov. 28 on the New York Mercantile Exchange before closing at $98.21/bbl, up $1.44 for the day. The February contract regained $1.42 to $98.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.04 to $98.21/bbl after the cash markets were closed Nov. 24-25.
Heating oil for December delivery increased 4.26¢ to $2.97/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced $6.92¢ to $2.52/gal.
The expiring December natural gas contract fell 17.8¢ to $3.36/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 55.7¢ from the last reported Nov. 23 price to $3.12/MMbtu on Nov. 28.
In London, the January IPE contract for North Sea Brent advanced $2.60 to $109/bbl. Gas oil for December rebound $11.25 to $950/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.02 to $108.75/bbl.
Contact Sam Fletcher at email@example.com.