MARKET WATCH: Energy prices rise while equity markets fall

Energy prices rose Nov. 22 with natural gas up on lower temperatures and crude again closing above $98/bbl in the New York market, but the equity market was “crushed” by a strong downward revision in the US third-quarter gross domestic product.

The US Department of Commerce said the US economy expanded at a rate of 2%/year in the third quarter, down from its previous estimate of a 2.5% gain. Government officials also reported after-tax incomes fell by the largest amount in 2 years, the result of high unemployment and less pay raises (OGJ Online, Nov. 22, 2011).

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil strengthened yesterday on the news of a protest in Saudi Arabia and the International Monetary Fund’s announcement of the new liquidity program” allowing a country to borrow up to 10 times the amount of its contribution to IMF. The program is aimed at relieving the sovereign debt of troubled European countries.

“Today looks to be another down day across the board as pressure mounts for Germany to accept Euro-zone bonds,” said analysts in the Houston office of Raymond James & Associates Inc. The price of crude was “sharply lower” in early trading Nov. 23. “Newly released minutes from the Federal Reserve's early November policy-setting meeting further signaled economic vulnerability,” they said.

In yesterday’s market, Zhang said, “Gasoline outperformed the oil complex again, while middle-distillates and fuel oil lagged. Refining margins softened after a strong recovery over the past few weeks, with high-sulfur crude margins and hydrocracking margins substantially outperforming low-sulfur crude and FCC margins. The West Texas Intermediate structure weakened further in anticipation of an inventory build at Cushing, Okla., with its first 5 months in contango. In contrast, the Brent structure was firmer.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The distillate cracks have been a key support to the oil complex in recent weeks, but the weather has been warmer than normal on both sides of the Atlantic. The low-sulfur premiums have already started to come off in recent days, and now the backwardation in ICE gas oil is starting to head south while the backwardation in ICE ultralow-sulfur diesel is almost gone. With the current mild weather, the European end-consumer should be in no rush to pay current prices for heating gas oil. A contango has also returned to the heating oil January-February spread [in the New York market], spilling over from the December-January contango.”

Meanwhile, Jakob’s earlier warnings of possible bankruptcies among oil tanker operators apparently are coming true “as one cannot continue to run ships forever at negative returns.” He said, “Last week it was General Maritime going into Chapter 11; yesterday it was Frontline announcing that they will run out of cash in the first quarter 2012, and the shipping debacle will probably not end there. There are just too many oil tankers and not enough oil flows.”

Iran may be able to take advantage of “cheap” tankers for floating storage “if the European Union follows the French president in calling for an embargo on Iranian oil imports,” Jakob said. He noted European members of the Organization for Economic Cooperation and Development import “as much crude oil from Iran as from Saudi Arabia.” Jakob said, “It would be very easy for the UK or Germany to have an embargo on Iranian crude oil given that they don’t import anymore from that source. France still imports about 70,000 b/d of Iranian crude oil but could do with no Iranian imports without too great difficulties.”

But an embargo on imports of Iranian crude “will be a greater struggle for the European southern peripheries, i.e. the same countries that are suffering the most from credit issues,” said Jakob. “It will be interesting to see how the Greek refineries would survive without Iranian crude oil. And then there is Turkey (not an EU member), which imports 50-70% of its crude oil from Iran. Bottom line: while it is relatively easy (and not very courageous) for countries that do not import Iranian crude oil to call for an embargo of  imports, it will be very difficult for countries that do import Iranian crude oil to join in such non-UN sanctions. China has joined Russia in refusing further sanctions on Iran so one can forget for now any UN-backed sanctions on oil imports from Iran.”

US inventories

The Energy Information Administration said Nov. 23 commercial US inventories of crude fell 6.2 million bbl to 330.8 million bbl in the week ended Nov. 18, counter to a Wall Street consensus for a 500,000 bbl increase. Gasoline stocks increased 4.5 million bbl to 209.6 million bbl in the same week, outstripping market expectations of a 1 million bbl gain. Both finished gasoline and blending component stocks were up. Distillate fuel inventories declined 800,000 bbl to 133 million bbl, short of Wall Street expectations of a 1.3 million bbl drop.

Imports of crude into the US were down 246,000 b/d to 8.3 million b/d last week. In the 4 weeks through Nov. 18, crude imports averaged 8.6 million b/d, an increase of 225,000 b/d from the comparable period a year ago. Gasoline imports averaged 956,000 b/d last week while distillate fuel imports averaged 135,000 b/d.

The input of crude into US refineries increased 117,000 b/d to 14.8 million b/d last week with units operating at 85.5% of capacity. Gasoline production increased to 9.5 million b/d while distillate fuel production increased to just under 4.8 million b/d, EIA officials said.

EIA also reported the injection of 19 bcf of natural gas into US underground storage in the week ended Nov. 11, up from a Wall Street consensus of an 18 bcf injection. That put working gas in storage at 3.85 tcf, up 14 bcf from the level last year at this time and 224 bcf above the 5-year average. The report was published a day early because of the US Thanksgiving holiday on Nov. 24.

Energy prices

The January contract for benchmark US light, sweet crudes on Nov. 22 exceeded its loss from the previous session, up $1.09 to $98.01/bbl on the New York Mercantile Exchange. The February contract gained $1.20 to $98.19/bbl. On the US spot market, WTI at Cushing was up 60¢, back in step with the front-month futures contract at $98.01/bbl.

Heating oil for December delivery increased 4.03¢ to $3.03/gal, ending a 4-session losing streak on NYMEX. Reformulated stock for oxygenate blending for the same month continued climbing, up 7.28¢ to $2.56/gal.

The December natural gas contract gained 1.6¢ to $3.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 11¢ to $3.04/MMbtu.

In London, the January IPE contract for North Sea Brent was up $2.15 to $109.03/bbl. Gas oil for December regained $2.50 to $952/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 60¢ to $108.34/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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