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MARKET WATCH: Crude oil prices rise, but uncertainties remain

Crude oil prices moved moderately higher Dec. 9 with crude again closing above $99/bbl in the New York market on initial perceptions of economic improvement around the globe.

It was “another positive week for the markets as leaders of the Euro-zone signed off on the plan for increased fiscal integration,” said analysts in the Houston office of Raymond James & Associates Inc. However, they said, “All eyes remain on the European debt crisis and the strength of the US economy, with a number of important economic reports set to be released during the week.” Broader markets were trading lower Dec. 12, with crude and natural gas following suit, as traders reassessed last week’s developments.

Moreover, ministers of the Organization of Petroleum Exporting Countries will meet Dec. 14 in Vienna. But if the pattern of OPEC’s last meeting is repeated, Raymond James analysts said, “We may not see much of the cooperation we are used to seeing from the group.”

They said, “It is unclear what a second meeting in a row without consensus would mean for the cartel. Cooperation is key to making OPEC effective, and members have been trying to mend fences since June. While market observers largely expect OPEC members to maintain current production levels, the recent surge in oil prices, faster-than-expected recovery in Libyan oil production, and the possibility of a European ban on Iranian oil imports could complicate this meeting.”

Despite initial increases in equity and energy prices, “we would be cautious in concluding that ‘the market’ took the conclusions of the EU Council meeting very positively,” warned Olivier Jakob at Petromatrix in Zug, Switzerland.

While last week’s EU summit “was not a real disaster,” Jakob said, “it also was not the big bazooka that could have [been] expected and this because of Britain walking out on the deal.” The UK’s nonparticipation in the agreement endorsed by other European governments poses “some significant uncertainties to the legal framework of using European institutions to implement a series of intergovernmental treaties rather than an EU treaty. Bottom line: after the headline announcement there are still a lot of unknowns, and with that we also run the risk that Standard & Poor’s is not impressed and goes on with a few downgradings [of sovereign debt ratings]. Over the weekend Moody’s came out with the statement that [the Dec. 9] deal had few new measures and that it will revisit the European sovereign ratings in the first quarter of 2012,” he reported.

“The sovereign debt market is a better benchmark to the sovereign debt crisis than the stock market, and the yields were not exactly plunging on [Dec. 9],” said Jakob. They came off sharply [on Dec. 5] but then rose back in the second part of the week when the European Central Bank (ECB) made it clear that it would not be the buyer of last resort in the primary market and that it would not go against the spirit of its constitution by using the International Monetary Fund to do what it is not allowed to do.”

He said, “For now the yields on Italian bonds are still (despite the ECB buying on the secondary market) at levels that are not sustainable. The EBC is opening further the liquidity lines for banks, and it did lower the benchmark interest rates, which are positive decisions but which are also highlighting the credit crunch currently in Europe. One way or another, 2012 will be a year of great austerity and very slow growth for Europe.”

In Dec. 9 trading, James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Gasoline outperformed in the oil complex, while middle-distillates suffered a sharp sell-off. The term structures of Brent and ICE gas oil fell further, which shows signs of weakness in the physical market. Volatility rose again after a recent decline and remained elevated compared [with] historical levels.”

Net for last week, front-month West Texas Intermediate and Brent contracts lost $1.55/bbl and $2.53/bbl, respectively. “The market was higher at the beginning of last week in anticipation of a solution for the Euro-zone crisis from the EU summit,” said Zhang. “However, the market was dragged down by a set of bearish US oil inventory numbers and an uninspiring agreement struck by EU leaders. The ECB also stopped short of offering to increase its purchase of the Eurozone government bonds. S&P is set to update their rating on Eurozone sovereign bonds in the next few days, the outcome of which will largely depend on the ECB’s responses following the EU summit.”

Jakob noted the University of Michigan Consumer Confidence Index for December, released Dec. 9, was higher than expected, showing a fourth consecutive month of gains. “The US consumer confidence is not yet as high as at the beginning of the year, but the trend is rising rather than declining,” he said. “Another positive statistic…was the reduction of the Chinese consumer price index (CPI) showing four consecutive declines in the year-on-year comparison. Combined with the fact that China has been lowering the banks’ reserve ratio obligations, this will be taken as increasing the chances that China moves back to a more dovish monetary policy. Chinese export growth in November was at the lowest level since 2009, with a marked slowdown to Europe, while India’s industrial production in October shrank for the first time since 2009.”

In other news, the United Nations climate change conference ended Dec. 11 in Durban, South Africa, with—as was generally expected—no major decisions. “On the other hand, a complete collapse was avoided, with the major emerging markets agreeing for the first time to a roadmap for taking part in a legally binding treaty containing caps on carbon emissions,” Raymond James analysts reported. “The plan at this point is to move towards the new global treaty (a successor to the Kyoto Protocol) by 2015, taking effect around 2020. In other words, don't hold your breath.” The next UN climate change conference is scheduled in a year in Qatar. “In the meantime, the European Union and a few small countries have agreed to extend Kyoto's emissions rules beyond 2012. This extension will not affect the US (which never ratified Kyoto), Canada, Japan, or Russia,” said Raymond James.

Energy prices

The January contract for benchmark US light, sweet crudes dropped as low as $97.36/bbl in intraday trading Dec. 9 on the New York Mercantile Exchange before recouping to close at $99.41/bbl, up $1.07 for the day. The February contract regained $1.06 to $99.60/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.07 to $9941/bbl, in tandem with the front-month futures price.

Heating oil for January delivery continued to drop, losing 1.73¢ to $2.91/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, rose $2.95¢ to $2.60/gal, wiping out the loss in the previous session.

The January natural gas contract fell 14¢ to $3.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 11.9¢ to $3.31/MMbtu.

In London, the January IPE contract for North Sea Brent increased 51¢ to $108.62/bbl. Gas oil for December dropped $16.25 to $932/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost $1.53 to $107.45/bbl. With the final weeks of 2011 ticking down, OPEC’s basket price now averages $107.53/bbl for this year, compared with $77.45/bbl for all of 2010.

Contact Sam Fletcher at samf@ogjonline.com.


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