MARKET WATCH: Crude oil price rises as stock market rallies

The stock market rallied Dec. 2, posting its highest weekly gain in 3 years as central banks moved to resolve liquidity issues in Europe, but petroleum prices increased only moderately.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil moved higher on the back of potential political progress over the Euro-zone debt crisis. The US employment report was also broadly supportive for prices.”

Last week Standard & Poor’s 500 Index fully reversed its Thanksgiving week losses and again is “within shooting distance of being unchanged for the year,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The rally was extremely strong, with the S&P 500 gaining 7.39% during the week for a year-to-date performance [down] 1.06%.”

On Dec. 5, Italy announced a new austerity program. In addition, French President Nicolas Sarkozy and German Chancellor Angela Merkel met to try to reach agreement on how to save the euro through stricter oversight of government budgets.

Zhang reported, “Oil products climbed faster than crude due to low product inventories, which helped to arrest the recent fall in refining margins. The term structures for both Brent and West Texas Intermediate were broadly unchanged—Brent remains stuck in steep backwardation.”

The latest wave of economic optimism “appears to have caught the market off guard and prompted short-covering,” Zhang said. “Meanwhile, commercial hedgers added to their hedging positions on both sides, as volatility declined.”

He said, “This week the market will remain focused on the [Dec. 9] European Union summit. The European Central Bank is set to cut its benchmark interest again on its meeting this week. For the oil market specifically, tension over Iran remained high, which has kept oil price volatility at an elevated level, and the market bidding tail risks. We expect the oil price to remain heated in the near future as supply shortfalls continue. A general liquidity draw-down towards yearend, however, discourages risk-taking. We take our central scenario till yearend as ‘muddle-along’ with a range-bound bias in price action.”

In Houston, analysts with Raymond James & Associates Inc. said, “While the near-term outlook for the oil market remains extremely hazy, our view on the US natural gas market is getting even more bearish. With gas prices now having spent the past few months sub-$4/Mcf, we believe that our prior $4/Mcf price forecast for 2012 was not sufficiently pessimistic. Accordingly, we are taking our 2012 forecast down 50¢ to $3.50/Mcf. We would note that even though our new forecast is likely the low on Wall Street, it is only about 25¢ above the current gas strip. If our assumptions prove to be correct, look for natural gas prices to reach sub-$3/Mcf levels next summer.”

On the oil front they said, “We are again ‘marking to market,’ which this time entails an increase in WTI. Our Brent assumption remains $100/bbl, while our WTI assumption becomes $92.50/bbl (up from $85/bbl). The higher WTI forecast reflects the significantly narrowed WTI-Brent spread as a result of the Seaway pipeline's impending reversal.”

Energy prices

The January and February contracts for benchmark US light, sweet crudes both gained 76¢ to $100.76/bbl and $101.09/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was up 76¢, to $100.96/bbl.

Heating oil for January delivery increased 2.05¢ to $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 5.83¢ to $2.62/gal.

The January natural gas contract lost 6.4¢ to $3.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 10.2¢ to $3.37/MMbtu.

In London, the January IPE contract for North Sea Brent increased 95¢ to $109.94/bbl. Gas oil for December advanced $5.25 to $951.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 25¢ to $109.66/bbl. So far this year, OPEC’s basket price has averaged $107.49/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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