MARKET WATCH: Crude oil tests $100/bbl in New York market

Energy prices were mixed Dec. 23, although the front-month crude contract temporarily crested $100/bbl in intraday trading on the New York market.

“The geopolitical risk premium is rearing its head again in the oil market,” said analysts in the Houston office of Raymond James & Associates Inc., citing “major bombings in Iraq, constant bloodshed and even suicide bombings in Syria, more looming civil unrest in Egypt, and Iranian centrifuges are still spinning.” With all that, it is “no wonder” crude is pushing the $100/bbl mark again, they said.

Western markets were closed Dec. 26 for the Christmas holidays, but the Associated Press reported prices were up in early trading Dec. 27 in US stock markets despite the Standard & Poor's-Case-Shiller index of home prices dropping in October in 19 of the 20 cities it tracks—the second decline in as many months.

Raymond James analysts reported, “Markets are focusing their attention on Europe and the results of the €11.5 billion Italian debt auction” scheduled Dec. 29. “This debt auction is especially meaningful as Italian 10-year bond yields are inching closer to the 7% level that pushed Greece, Ireland, and Portugal to receive bailout funds,” they said.

Olivier Jakob at Petromatrix in Zug, Switzerland, sees little change in Europe. The euro remained weak but stable last week but still risks an S&P downgrade of credit ratings of Euro-zone members in January. The weaker euro means European consumers are paying record high prices for fuels, he said.

“At the current crack values, the margins on the US Gulf Coast will be under less pressure to lower refinery runs, and we will therefore enter a new cycle where demand needs to be strong enough to support refinery runs,” said Jakob. “The US products (reformulated stock for oxygenate blending and heating oil) January contracts will expire Dec. 30 and in front of the expiry the RBOB January-February spread is moving back into a backwardation.”

He reported, “The US vehicles-miles of travel in October were down 2.3% vs. a year ago and the cumulative travel for 2011 is down 1.4%. The high flat price and high unemployment ratio are having a strong impact on gasoline consumption on both sides of the Atlantic.”

Jakob said, “The European naphtha crack was stable to marginally weaker during last week. If exports to the Far East have helped to provide some relief to the naphtha crack, the lack of a European winter should maintain some competition from propane while the European industrial demand remains a big question mark for the first half of 2012.”

He said, “The main change in relative values last week was in the gasoline cracks. Demand in the Atlantic Basin is still moribund. However, with the crack values moving back to positive values, that should apply less pressure on the operating rates of refineries. We now have to question how much more room there is in the gasoline relative values but also in the distillate complex given the lack of a winter pull.”

Warm weather

Natural gas and fuel oil prices were down Dec. 23 because of warmer-than-average winter weather. But warmer and drier weather has boosted US oil field activity and the earnings of oil field service companies, said analysts at Pritchard Capital Partners LLC.

“Severe cold, and particularly icy conditions, will slow oil field activity even in areas that typically experience true winters,” they said. “Accordingly, it appears the risk of earnings misses due to adverse weather is minimal. At the same time, our sense of underlying demand is that the oil patch is hopping. We anticipate some holiday impact (limited by Christmas falling on a Sunday), but the typical end-of-year shutdown among operators appears muted. These two factors combined reinforce our fourth quarter outlook for companies with significant operations in the Lower 48.”

In other news, the US corn ethanol excise tax credit of 45¢/gal is to expire Jan. 1. “While similar ‘sunset dates’ have been set before, the difference is that in years past, Congress would invariably extend the credit. This time, however, Congress has left for the holidays without an extension, even a partial one (as the Obama administration supports),” said Raymond James analysts.

They said, “The supply-demand dynamics in the ethanol market are such that the credit's main beneficiaries—to the tune of $6 billion in 2011—have long been not the ethanol producers themselves but rather the fuel blenders, such as Valero Energy Corp. and ExxonMobil Corp. The Renewable Fuels Standard remains in place, so demand for corn ethanol will be essentially unchanged. Also, the cellulosic biofuel tax credit of $1.01/gal doesn't expire until the end of 2012, though so far there is almost no domestic production that benefits from it.”

Energy prices

The February contract for benchmark US sweet, light crudes traded as high as $100.23/bbl Dec. 23 on the New York Mercantile Exchange before closing at $99.68/bbl, up 15¢ for the day. The February contract rose 13¢ to $99.83/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 15¢ to $99.68/bbl.

Heating oil for January delivery dropped 16.9¢ to $2.89/gal on NYMEX. RBOB for the same month increased 4.74¢ to $2.69/gal.

The January natural gas contract declined 5.5¢ to $3.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 4.2¢ to $2.97/MMbtu.

In London, the February IPE contract for North Sea Brent increased 7¢ to $107.96/bbl. Gas oil for January lost $5 to $914.50/tonne.

The Organization of Petroleum Exporting Countries’ offices were closed, so no price update was available.

Contact Sam Fletcher at samf@ogjonline.com.

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