Energy prices fell Nov. 18 amid continued discomfort over the debt crisis in both Europe and the US, with crude dropping 1% and natural gas down 3% in the New York market on fears of declining demand.
The ongoing European debt saga produced uncertainty in the broader markets with the Standard & Poor’s 500 Index trading flat and the energy sector following suit. “Yesterday, Spain's conservative party won a majority vote over the ruling socialist party, the third government in recent weeks to shift power,” said analysts in the Houston office of Raymond James & Associates Inc “Not to be outdone, the US seems to be having problems of its own as Republicans and Democrats are once again at odds over how to reduce the country’s massive deficit. Although the Nov. 23 deadline to come to a decision is still in place, it has been reported that the Congressional ‘super committee’ will likely concede failure before then. Disappointing news out of the US could have the effect of pouring gasoline on a fire.”
Indeed, the Associated Press reported sharp price declines in early trading Nov. 21 in US stock markets on speculation the 12-member bipartisan Congressional committee appeared ready to admit its failure to agree on at least $1.2 trillion in budget cuts. Such a failure would activate automatic spending cuts over 10 years starting in 2013. Any Congressional attempt to deactivate those automatic reductions could result in another downgrade of the country’s credit rating, analysts said. The committee’s failure also will renew the fight over a payroll tax cut and an extension of unemployment insurance benefits, both of which expire at the end of December.
The S&P 500 “is struggling to keep its head above water” in the last weeks of 2011 trading, having lost 3.8% last week and now down 3.3% for the year, while the NASDAQ dropped 3.9% last week and is down 3% for the year. Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The energy, materials, and financials sectors were leading the US market lower.”
Europe—“or rather the lack of Europe,” Jakob said—continues to dominate global markets, with “the point of concern” moving away from Greece “towards the center, and a significant battle is ongoing over the possibility of transforming the European Central Bank into a real printing press.” He reported, “The Germans are against it, France is for it and that can be understood given the rising yields on French debt. But in the meantime it creates an increasing cacophony. In the peripheries the ECB is still a major supportive act for the sovereign bonds, but despite that support the Spanish debt yields still surged to new record highs last week. The sovereign debt crisis in Europe has never been so wide-spread. The contagion is in full swing, and it is difficult in the current environment not to fear a private credit crunch soon. We are certainly not in a ‘normal’ environment in Europe, and it is therefore wise to run some credit crunch stress test scenarios.”
A ‘policy void’
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “There is a policy void in Europe. The [bailout] plan agreed to [by Euro-zone members] at the end of October appears to have made little progress, in particular, the Europe Financial Stability Fund. This precarious situation will keep oil market volatility elevated. The physical crude market shows some signs of easing as the Brent structure continues to weaken. However, low oil inventories globally are likely to keep oil in backwardation, albeit not as steep as a few weeks ago. We only look for a substantial downside move in the oil flat price when the term structure is firmly in contango.”
Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, said, “We remain pessimistic that the Gordian knot of conflicting interests among European Union members can ever be unraveled. With democracy in Greece and Italy now temporarily in the [emergency ward] as a result of the debt crisis, France and Germany have continued to clash over the role the ECB should play.”
Meanwhile, Prime Minister David Cameron of the UK—not a Euro-zone member—“has infuriated Euro-zone leaders by intervening in the row. Concerns over Europe's ability to stop the sovereign debt crisis from spinning out of control have depressed equity prices in recent weeks,” KBC analysts said.
Oil product prices fell slightly more than crude in Nov. 18 trading. Nevertheless, Zhang reported, “Refining margins improved significantly over the last 2 weeks, which should provide some support to crude prices. However, there have been marked differences among different grades of crude oil. Distillate-rich crude is much more favored than light crude with high naphtha and gasoline yields. The Dubai and Brent spread narrowed sharply over the past week, also as a result of strong distillate cracks but very soft gasoline cracks.”
Net for last week, front-month WTI and Brent contracts fell $1.58/bbl and $7.54/bbl respectively “despite strong economic data for the US.” Zhang noted WTI fared better than Brent after Enbridge Inc. and Enterprise Products Partners LP agreed to reverse the flow direction of the Seaway pipeline to move crude from Cushing, Okla., to the US Gulf Coast, with an initial capacity of 150,000 b/d in second-quarter 2012 (OGJ Online, Nov. 17, 2011).
However, Zhang said, “Rising bond yields in Spain and France worsened concerns that the European debt crisis would not be contained.”
Jakob said, “The crude oil [price] correlations either to the S&P 500 or to the euro-dollar [valuations] have been totally broken since the last weeks of October because of the volatility in the Brent-West Texas Intermediate spread. Correlation trading in crude oil futures needs to wait for greater stability in the Brent-WTI spread before it can again be a theme.” With the US Thanksgiving holiday close enough to smell the roasting turkey, trading will be confined to the first 3 days of this week.
Middle East unrest
The International Atomic Energy Agency's recent report that Iran’s nuclear program is aimed at producing weapons indicates “a lethal brew when combined with a Middle East that is already in turmoil,” said Raymond James analysts. “If Washington will not force the issue, Israel almost certainly will. The increasingly limited timeframe to stop Iran from going nuclear means the likelihood of a major military confrontation is now a very important consideration for energy investors.”
However, they said, “When it comes to internal unrest, it is Iran's close ally Syria that seems to be approaching a point of no return. Similar to Libya early in its uprising, what began as peaceful protests against [Syria's President Bashar] Assad is increasingly turning into an all-out civil war. Over the weekend, Syria effectively rejected the Arab League's peace plan by making unacceptable demands. Meanwhile, attacks by the Free Syrian Army—the opposition's military wing, comprised of army defectors—continue to escalate, including Sunday's attack on a ruling party office in Damascus (the first such attack inside the capital). Syria is a minor oil producer, normally pumping 350,000 b/d and exporting one third of this, but these sales are a crucial source of hard currency for the regime. The European oil embargo appears to be having an effect, with Syria's storage tanks full and the government cutting back on production.”
Last week “the Arab League finally lost patience with Syria, suspending its membership [in] the organization and threatening economic sanctions against it,” KBC analysts said. “Iran’s foreign minister said the Arab League’s action was a threat to the region’s security. His Turkish counterpart, meanwhile, ratcheted up the pressure, comparing the situation in Syria to that in Libya before the revolt that ousted the late Muammar Gadhafi. The Turkish prime minister said his country is seeking new transport routes to the Middle East to bypass Syria, arguing that measures must be taken for the safety of energy supplies as well as to achieve peace. Meanwhile, Kuwait’s parliament was stormed by protestors, who the government now describes as anarchists, reviving concerns that the Arab Spring may spread to the large Persian Gulf oil producers,” they said.
The Arab League is now working on a draft UN resolution, backed by France, which has withdrawn its ambassador to Syria. KBC analysts reported, “Russia and China have opposed previous efforts to condemn Syria, but the Arab League’s decision may make it more difficult for the two superpowers to oppose future resolutions. All this comes against a background of simmering tension between Israel and Iran because of the latter’s nuclear ambitions.”
Lower autumn temperatures and rising political heat in the Middle East have kept North Sea Brent prices near $110/bbl, “despite the worsening of the Euro-zone debt crisis as investor nerves widened to include Spain, Italy, and Belgium,” KBC analysts said.
In other news, Jakob said, “The Japanese are definitely not as successful as the Swiss in manipulating their currencies. The yen is climbing back towards it pre early-November intervention levels. The Swiss franc on the other hand is gently sliding lower as the Swiss National Bank has given a lot of pre-warning that it wants the Euro-Swiss [valuation] to rise to a higher level than the current 1.20.”
The December contract for benchmark US light, sweet crudes bounced between $96.64-100.15/bbl Nov. 18 on the New York Mercantile Exchange before closing at $97.41/bbl, down $1.41 for the day. The January contract dropped $1.26 to $97.67/bbl. On the US spot market, WTI at Cushing was down $1.41 to $97.41/bbl.
Heating oil for December delivery lost 5.07¢ to $3.03/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 2.87¢ to $2.48/gal.
With mild weather, the December natural gas contract dropped 9.4¢ to $3.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 10.6¢ to $3.01/MMbtu.
In London, the January IPE contract for North Sea Brent slipped 66¢ to $107.56/bbl. Gas oil for December was unchanged at $973/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes fell $1.71 to $110.83/bbl, still above its average price of $107.43/bbl so far this year.
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