MARKET WATCH: Renewed hope for Euro-zone hikes oil prices

Oil prices rose Nov. 10 with crude temporarily climbing above $98/bbl in the New York market following a better-than-expected US weekly job report and encouraging political developments within the Euro-zone.

“Natural gas missed the bus, however, falling slightly after the Energy Information Administration reported a build in inventories that was above consensus expectations,” said analysts in the Houston office of Raymond James & Associates Inc. (OGJ Online, Nov. 10, 2011). Trading volume in the New York market is expected to be low Nov. 11 with banks closed for the Veterans’ Day holiday in the US.

Meanwhile, crucial economic reforms demanded by other members of the European Union were approved by the Italian Senate, a major step toward the resignation of Premier Silvio Berlusconi perhaps as early as Nov. 12. The reform legislation now goes to the lower Chamber of Deputies, which is likely to vote tomorrow.

Greece's new interim cabinet under former European Central Bank Vice-Pres. Lucas Papademos as prime minister was sworn in. The new government now must enact terms of the €130 billion agreement in late October by the EU.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The financial market cautiously welcomed the political developments in Greece and Italy, which are most likely to lead to technocrat governments in the two countries. Italy’s 10-year government bond yield dropped below 7%.”

Still, he said, “The oil market remains torn between a tight physical market and uncertainty in the macroenvironment. As the Euro-zone debt crisis intensifies, volatility in the oil market looks set to remain very high. The oil price will be heavily exposed to the broad market sentiment and is under significant downward pressure. In the meantime, the very tight physical market will keep structures firmly in backwardation in the coming weeks. As we have been reiterating, we favor middle-distillates despite the very strong rally during the past month, but we take a bearish view on light and heavy products.”

It’s “often said that America acts while Europe dithers,” but recent events “are proving the opposite,” Raymond James analysts said. “After the leaders of Germany and France decided that Greece needed a new government, it took less than a week [to create one]. Next, they turned their focus to Italy, and Berlusconi is set to resign this weekend. By contrast, the White House is pushing out its decision on the Keystone XL pipeline until after the 2012 election. To recap: 1 week to remove the elected leader of a G-7 country, and several years to make a decision on a pipeline. You can decide who's got their act together.”

Preempting a final presidential decision due by the end of December, the US Department of State on Nov. 10 halted the permitting process for Keystone XL for an eleventh-hour reevaluation of alternative routes for the pipeline. The administration plans further review after the 2012 presidential election, effectively delaying a decision into 2013. “A partial victory for environmentalists, the decision comes after a strong anti-XL campaign was mounted in Nebraska due to concerns over the pipeline routing through the Ogallala Aquifer. Given that TransCanada has supply contracts for volume commitments due to expire in 2012 and 2013, the delay could mean the end of XL,” Raymond James analysts reported.

They also pointed out, “There are several projects under way that would undercut XL, including Enbridge Inc.’s Northern Gateway project and the proposed Wrangler pipeline—a possible JV between Enbridge and Enterprise Products Partners LP. Further, with the recent completion of the Bakken Oil Express and several other rail projects underway, the delay could be a boon for the North American railroad industry. In short, we expect more Canadian crude to move east and the Cushing, Okla., glut, which is driving the Brent-West Texas Intermediate disconnect, to persist.”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Despite economic uncertainties, demand for middle distillates such as diesel and gas oil is supporting oil demand growth, which we expect will rise by roughly 1.3 million b/d in 2012. This, in turn, is likely to keep upward pressure on prices in our view, even assuming growth in oil exports from Libya and Iraq.”

He said, “China's October oil demand growth was sluggish at 1.5% year-on-year, according to preliminary data, in part due to the base effect. In our view, demand will improve sequentially this month and next with the return of refinery capacity from maintenance work.”

As for natural gas, Sieminski said, “With supply still rising in a weak demand environment, storage is filling up and is nearly certain to exceed last year's November peak. Moreover, it appears set to hit a record high in the spring of 2012. Analysts' price forecasts, which have been well above the futures curve, are likely to be pressured lower.”

The Iran factor

James West at Barclays Capital Equity Research, New York, reported, “This week Iran returned to center stage as one of the key political risks in the oil markets. The International Atomic Energy Agency (IAEA) released its most alarming report to date on Iran's nuclear program, stating that it is increasingly concerned about possible undisclosed Iranian nuclear activities. The IAEA report goes into great detail, relying on a wide variety of sources to make a case that there is credible evidence that Iran is working on the critical technologies required to produce a deliverable weapon.”

That report “comes at particularly tense time in US-Iranian relations,” West noted. “Last month, the US Attorney General accused members of the Iranian Revolutionary Guards' Quds Force of conspiring to assassinate the Saudi Ambassador to Washington by bombing a Georgetown restaurant popular with members of Congress and the diplomatic community. The White House looks set to use the latest IAEA report, as well as the assassination allegations, to push for tougher economic sanctions against Iran.”

Meanwhile, there is renewed speculation of a possible Israeli strike on the Iranian nuclear facilities. West said, “Although Israel may face fewer technical constraints to launching a unilateral strike on Iran than it did a few years ago, it still remains far from certain that Israel would conduct a unilateral strike over the objections of the US, risking a serious deterioration in the bilateral relationship.”

He said, “We continue to believe that the risks of a regional war involving Iran remain low. However, this risk has risen since last year. Thus, the possibility that continued Iranian intransigence over its nuclear program, combined with provocative foreign policies, will produce some type of military confrontation in the next 12 months should not be discounted.”

West said, “For oil, other than the ratcheting up of sanctions, which cripples the already struggling Iranian oil sector further, the key concern in the oil markets is the potential closure of the Strait of Hormuz, given that it is the sole waterway leading out of the Arabian Gulf. Despite the wide range of views on whether Iran could actually close the strait, we think it is fair to say that the US would manage to keep it open, especially given the positioning of the Fifth Fleet in Bahrain. The key question, then, may not necessarily be whether Iran can sink a dozen oil tankers, but whether it could impede shipping enough to prompt US intervention in defense of the sea lanes.”

However, he concluded, “Although the actual likelihood of closure of the strait remains low, even the mere possibility of disruption to the traffic in the Strait of Hormuz would likely stir market sentiment and strongly support oil prices, especially in an environment of extremely tight fundamentals. Moreover, the presence of lranian light naval forces around the strait heightens the risk of raids on key offshore facilities and on other gulf coast targets.”

Energy prices

The December contract for benchmark US light, sweet crudes traded as high as $98.35/bbl Nov. 10 on the New York Mercantile Exchange before closing at $97.78/bbl, up $2.04 for the day. For the second consecutive day, prices for the NYMEX January contract and for WTI on the US spot market at Cushing rose the same amount as the December contract, up $2.04 each to $97.68/bbl and $97.78/bbl, respectively.

Heating oil for December delivery increased 5.25¢ to $3.15/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 0.74¢ to $2.64/gal.

The December natural gas contract dipped 0.3¢ but closed essentially unchanged at a rounded $3.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 4.9¢ to $3.46/MMbtu.

In London, the December IPE contract for North Sea Brent increased $1.40 to $113.71/bbl. Gas oil for November was unchanged at $998.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.46 to $111.67/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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