MARKET WATCH: Crude oil prices rise; European crisis continues

Oil prices escalated Nov. 7 with crude closing above $95/bbl in the New York market as natural gas prices again declined and economic and political issues deteriorated in Europe.

“Oil rallied as Brent broke through significant technical resistances in the 200-day moving average and the upper band of a well-established channel,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products failed to catch up to the strong rally in crude, resulting in weaker product cracks across the barrel and softer refining margins. Meanwhile, the term structures for both West Texas Intermediate and Brent followed flat prices and were firmer, on a persistently tight physical market.”

In Greece, negotiations between Prime Minister George Papandreou and opposition leader Antonis Samaras to share power in that country continued for a second day Nov. 8, amid indications that selection of a new prime minister is imminent. Papandreou and Samaras agreed over the weekend to forge an interim government to get the next phase of a €130 billion Euro-zone rescue fund through parliament.

In Italy, Premier Silvio Berlusconi won a vital vote in parliament but apparently lost his previous majority in the Chamber of Deputies. So far, he has refused pressure from key supporters and the opposition to resign in the face of the financial crisis in that country.

Zhang said the market generally had hoped Berlusconi would be voted out of power in favor of “a technocrat government” that would be “more likely to take control of the fiscal situation in Italy.”

Meanwhile, Zhang said, “Geopolitical risk has put the Middle East back on the radar as the International Atomic Energy Agency (IAEA) is due to release its report on Iran’s nuclear program. As the stake is so high, we do not expect any material change to the overall geopolitical situation in that region in the short term. Nevertheless, this increases the tail-risk of the market.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy were unable to control the Greek crisis “and we should not kid ourselves…they will be able to control the Italian crisis,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The bond spreads continue to rise higher, Italy is now entering the phase of terminality that Greece and Portugal went into, and it is quite clear that the firewalls have failed. If the fire cannot be put out quickly on the Italian bond yields, then we have to prepare for the worse (also keeping in mind that it is probably not only [bankrupt brokerage firm] MF Global that made the wrong bets on European sovereign bonds). Yesterday, the European Financial Stability Facility issued a 10-year bond at 177 basis points over German bonds and that compares to 51 basis points for a similar deal in June.”

Jakob said, “As the Euro-zone goes deeper into austerity, we will have to keep a very negative view on economic and oil demand for Europe. The preliminary estimate of French petroleum sales (survey ex independent storage and refineries) for October has gasoline sales down 2%, diesel up 2% and heating oil (FOD) down 10% vs. last year.”

He reported, “Crude oil futures have been able to hold pretty well despite the pressure coming from the rising Italian yields, but the strength is in line with our expectations of a rising geopolitical premium as we head into the countdown to the IAEA report on Iran.”

A renewed geopolitical premium will help end the previous correlation between oil prices and Standard & Poor’s 500 Index or the euro-dollar valuations. However, Jakob said, “The Iranian premium will not be good for oil demand or the economy in general. The cracks on light ends will be under more pressure, but with Iran the market will be pricing war rather than what is needed to have steady economic growth. Under the current Iranian theme, we do not want to be at the same time long global equities and long oil futures. It will also be interesting to see what happens to consumer confidence if increased tensions do materialize between Iran and the West after the IAEA report.”

Zhang said, “In the short term, the oil price is likely to rally as the technical break-out in Brent will inevitably attract fresh buying and prompt short-covering. Furthermore, the very tight fundamentals keep the oil market supported. That said, headwind from a soft economy and an ongoing Euro-zone crisis is likely to cap oil prices below $120/bbl. Across the barrel, we favor middle-distillates despite the very strong rally during the past month, but we take a bearish view towards light and heavy products.”

Energy prices

The December and January contracts for benchmark US sweet, light crude on the New York Mercantile Exchange and WTI at Cushing, Okla., on the US spot market were all up $1.26/bbl Nov. 7 to $95.52/bbl, $95.45/bbl, and $95.52/bbl, respectively. The December contract on NYMEX traded as high as $96.11/bbl in that session.

Heating oil for December delivery increased 4.9¢ to $3.12/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 6.48¢ to $2.73/gal.

The December natural gas contract dropped 8.7¢ to $3.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued its decline, down 5.3¢ to $3.36/MMbtu.

In London, the December IPE contract for North Sea Brent traded at $111.26-115.23/bbl in the Nov. 7 session before closing at $114.56/bbl, up $2.59 for the day. Gas oil for November continued its rally, up $15 to $984.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased to $111.08/bbl on Nov. 7 from $109.96/bbl at the end of last week. So far this year, OPEC’s basket price has averaged $107.24/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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