MARKET WATCH: Oil prices rise on Iran nuclear work reports

Crude oil and natural gas prices rose Nov. 8, up 1.3% each in the New York market, as Europe’s financial turmoil continued and Iran was reported working to put a nuclear payload on an intermediate-range missile capable of striking Israel.

The International Atomic Energy Agency (IAEA) under the United Nations reported Nov. 7 Iran is working specifically to develop nuclear weapons. Iran of course is the second biggest oil producer among members of the Organization of Petroleum Exporting Countries, behind Saudi Arabia. Its October production was estimated at 3.6 million b/d. “Any conflict in Iran could have serious supply implications for oil markets, and the anxiety this inspires has provided support to world oil prices for the past week,” said Raymond James analysts.

However, initial US reaction to IAEA’s report “has been conservative so far and not even suggesting harsh new sanctions against Iran (probably more sanctions on a few commercial banks),” said Olivier Jakob at Petromatrix in Zug, Switzerland.

“In our opinion the tone was more aggressive after the assassination attempt on the Saudi ambassador. Maybe the US administration has real concerns about Israel going alone after Iran, and therefore does not want to inflate the situation too much. ‘Iranium’ headlines will still need to be watched today. Russia and China are, however, unlikely to rush to allow an IAEA board resolution condemning Iran,” he said.

In Houston, analysts with Raymond James & Associates Inc. said, “Even before the IAEA report was published, Israel had openly contemplated military action against Iran’s nuclear program. Military action from Israel or its allies would likely result in Iran retaliating by trying to close the Strait of Hormuz, a major tanker route for oil exports from Saudi Arabia and Iran.”

They said, “Not surprisingly, this is causing some nervousness in the oil markets with crude rising 5% since Israel began mustering support for a military strike against Iran mid last week.”

Jakob said, “While crude oil futures continue to be supported by the ‘Iranium’ premium, the products are not following and the light-end cracks are suffering further. The naphtha and RBOB [reformulated stock for oxygenate blending] cracks to Brent are going, as we expected, deeper into negative territory, and the pressure is now coming to the European distillates physical premiums. This is something to follow closely given that the refining margins are currently supported only by the distillate and fuel oil crack. ICE gas oil expires tomorrow, and the backwardation is going through the roof, but with a very slow start to winter we have to monitor the weakening trend in the physical premiums.” He also noted heating oil in the New York market “is starting to enter contango territory.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Refining margins have dropped sharply since the beginning of this month, by around $4/bbl, as the market is anticipating an increase in refinery run rates at the end of the autumn maintenance season. Meanwhile, the term structures for West Texas Intermediate strengthened further in the wake of a sharp fall in crude inventories at Cushing, Okla. The Brent structure softened somewhat but remained in steep backwardation.

Meanwhile, President Giorgio Napolitano of Italy told uneasy markets that Premier Silvio Berlusconi has promised to resign after the next budget is approved by parliament and that Italy will have either a new government or early elections soon. Napolitano said economic reforms stipulated by other European Union members will be implemented within days. Raymond James analysts reported the New York equity market was up 1.2% Nov. 7 on Napolitano’s reassurances.

Zhang said, “Italy's 10-year government bond yield has exceeded the critical 7%—the level at which Greece, Portugal, and Ireland had to be bailed out. Although the departure of Berlusconi opens the door for a technocrat government, which is more likely to take control of the fiscal situation in Italy, the rapidly rising bond yield and Italy's hefty ongoing funding need is not allowing much time for a transition. The latest development in the Euro-zone appears to have spurred a general ‘risk-off’ sentiment in the market.”

Imports for Germany and France fell in September, “which could be a sign that demand in the two biggest Euro-zone economies might have declined,” said Zhang. Meanwhile, China’s inflation fell from 6.1% year-over-year in September to 5.5% in October.

Zhang said the increase in oil prices also was stimulated by technical buying and a further decline in US oil inventories.

US inventories

The Energy Information Administration said Nov. 9 commercial inventories of US crude dropped 1.4 million bbl to 338.1 million bbl in the week ended Nov. 4. The Wall Street consensus was for a 500,000 bbl increase. Gasoline fell 2.1 million bbl to 204.2 million bbl in the same period, counter to market expectations of a 1 million bbl build. Both finished gasoline and blending components decreased last week. Distillate fuel inventories plummeted 6 million bbl to 135.9 million bbl, far surpassing the market’s outlook for a 2.2 million bbl decline, EIA said.

The American Petroleum Institute earlier reported US crude stocks increased 148,000 bbl to 340 million bbl in the week ended Nov. 4. API said gasoline inventories declined 1.5 million bbl to 207.1 million bbl, while distillate stocks were down 2.9 million bbl to 141.6 million bbl.

EIA said imports of crude into the US declined 336,000 b/d to 8.6 million b/d last week. In the 4 weeks through Nov. 4, crude imports averaged 8.7 million b/d, up 34,000 b/d from the comparable period last year. Gasoline imports averaged 750,000 b/d, while distillate fuel imports averaged 102,000 b/d.

The input of crude into US refineries dropped 358,000 b/d to 14.3 million b/d last week with units operating at 82.6% of capacity, said EIA. Gasoline production decreased to 8.8 million b/d and distillate fuel production declined to 4.3 million b/d.

Energy prices

The December contract for benchmark US light, sweet crudes continued climbing Nov. 7, up $1.28 to $96.80/bbl on the New York Mercantile Exchange. The January contract increased $1.25 to $96.70/bbl. On the US spot market, WTI at Cushing rose $1.28 to $96.80/bbl, in step with the front-month futures price.

Heating oil for December delivery dipped 0.37¢ but closed essentially unchanged at a rounded $3.12/gal on NYMEX. RBOB for the same month declined 2.18¢ to $2.71/gal.

The December natural gas contract increased 4.9¢ to $3.75/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 7.3¢ to $3.43/MMbtu.

In London, the December IPE contract for North Sea Brent advanced by 44¢ to $115/bbl. Gas oil for November gained $10 to $994.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated $2.71 to $113.79/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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