MARKET WATCH: Crude temporarily tops $101/bbl but uncertainty haunts market

Energy prices climbed Dec. 13 with front-month crude surging above $101/bbl in the New York market before closing above $100/bbl, up 2.3% for the day.

In Houston, analysts with Raymond James & Associates Inc. credited the crude price jump to false rumors that Iran had closed the Strait of Hormuz, a choke-point for shipment of Saudi Arabian crude. The strength of the crude market and forecasts of colder weather for the next 2 weeks lifted natural gas prices 0.8%, they said.

Olivier Jakob at Petromatrix in Zug, Switzerland, reported the New York crude futures market “experienced a less-than-1-min price surge of $1.60/bbl” that sent various observers scrambling for an explanation. “It was suggested that there was a rumor that the Federal Reserve would announce [a third round of quantitative easing] QE3 or that there was a rumor that Iran was closing the Strait of Hormuz (that was the news of Dec. 12, not of Dec. 13),” he said.

However, Jakob said, “Buying on rumors usually lasts more than 30 sec, and nobody was buying when those rumors really started (i.e. after the price-move); furthermore, the market did not really correct lower when the US Navy confirmed that all was fine in the Strait of Hormuz or when the Fed announced nothing new.”

Instead, he said, “The oil futures market had a ‘strange’ trading pattern after the surge: oil futures [that] had normally been trading a certain correlation to the euro-dollar [valuation] or to the Standard & Poor’s 500 Index suddenly did not react at all to the euro falling off a cliff or to the S&P 500 falling on the lack of news from the Fed. Instead of trading around an Iranian rumor, our feeling—looking at the sequence of events yesterday and the market action in the second half of the day—is that something went either very wrong or very right (depending which side you are on) in the world of quantitative trading. The correlation machines that were turned-off yesterday after the 30-sec price surge seem to turn back on this morning.”

Sharp drops in oil and equity prices were reported in early trading Dec. 14, with crude trading near its lowest level for the month. Some observers blamed the weak euro, down below $1.30 for the first time since January, as dissatisfaction with last week’s European Union summit spread. The Associated Press reported Czech and Slovak leaders are balking at the EU plan that would have the poorer countries of eastern Europe helping bailout the biggest economies in western Europe.

Price of Brent

In Dec. 13 trading, James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil outperformed most of other commodities which were instead dragged down by a stronger dollar. Gasoline cracks managed to catch the rally, while distillates were lagging again. The term structure for Brent rallied yesterday and continued to follow a rather volatile pattern.”

Jakob said, “Given that the oil-to-dollar correlation trade totally broke down yesterday and that the dollar had a very significant surge, the price of Brent in euros/bbl is today as expensive as when Brent was at $120/bbl earlier in the year. Europe might be falling into a recession, but for the European consumer, the price of crude oil in euros is now as expensive as in the peaks of 2008 or of the Libyan crisis. Oil demand in Europe in 2011 was very poor, but with the current euro prices, we will not count on a demand revival for 2012.”

The 2011 average price for North Sea Brent crude “is poised to be the highest (in both real and nominal terms) since 1860, the year after the birth of the modern oil industry in Titusville, Pa.,” due to growing demand, supply concerns, and rising production costs, according to a new IHS Cambridge Energy Research Associates (IHS CERA) analysis.

The annual average price of Brent so far this year is “well above its previous high” average of $97/bbl in 2008. IHS CERA analysts expect Brent to average $111/bbl at the end of this year.

“Brent crude prices are approaching their highest annual average, a level higher than the peaks recorded by other widely accepted benchmarks going back to Col. [Edwin] Drake and the origins of the modern petroleum industry in Pennsylvania more than a century and a half ago,” said IHS CERA Chairman Daniel Yergin. “Quite simply, we are looking at the highest average price since the age of oil began.”

In other news, Canada announced it will withdraw from the Kyoto Protocol on climate change to avoid $14 billion in penalties for not reaching pollution-reduction targets. Just days after an unproductive United Nations climate conference in Durban, Canada’s environment minister said other countries likely will pull out of that agreement.

No major decisions are expected from the Dec. 14 meeting of ministers of the Organization of Petroleum Exporting Countries in Vienna. “Even if OPEC comes out with a total 30 million b/d supply target, Saudi Arabia will continue to have fluctuating production until there is more confidence on the actual level of Libyan crude oil exports, the state of the economy, and the implementation—or not—of an European ban on Iranian crude oil,” Jakob said.

US inventories

The Energy Information Administration said Dec. 14 commercial US crude inventories dropped 1.9 million bbl to 334.2 million bbl in the week ended Dec. 9, short of the Wall Street consensus for a 2.5 million bbl decline. Gasoline stocks were up 3.8 million bbl to 218.8 million bbl in the same period, far exceeding market expectations of a 1.2 million bbl increase. Both finished gasoline and blending components increased. Distillate fuel inventories moved up 500,000 bbl to 141.5 million bbl, short of the 1 million bbl gain analysts expected.

EIA reported imports of crude into the US were down 1.1 million b/d to 8.3 million b/d last week. In the 4 weeks through Dec. 9, crude imports averaged 8.8 million b/d, an increase of 232,000 b/d from the comparable 4-week period in 2010. Gasoline imports last week averaged 776,000 b/d while distillate fuel imports averaged 118,000 b/d.

The input of crude into US refineries fell 590,000 b/d to 14.7 million b/d last week with units operating at 85.1% of capacity. Gasoline production increased to 9.5 million b/d, while distillate fuel production decreased to just under 5 million b/d.

Energy prices

The January contract for benchmark US light, sweet crudes traded as high as $101.25/bbl intraday prior to closing at $100.14/bbl Dec. 13 on the New York Mercantile Exchange, up $2.37 for that session. The February contract climbed $2.33 to $100.32/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.37 to $100.14/bbl.

Heating oil for January delivery increased 3.27¢ to $2.93/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced 6.18¢ to $2.63/gal.

The January natural gas contract gained 2.5¢ to $3.28/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dipped 0.9¢ to $3.12/MMbtu.

In London, the soon-to-expire January IPE contract for North Sea Brent was up $2.24 to $109.50/bbl. The new front-month January contract for gas oil increased $9.50 to $932.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes gained 32¢ to $107.65/bbl, slightly above its average price so far this year.

Contact Sam Fletcher at samf@ogjonline.com.

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