An equity market rally virtually stopped and energy prices flattened Dec. 5 as Standard & Poor’s warned it may downgrade the credit ratings of 15 Euro-zone countries, including the strongest European economies of Germany and France, because of the group’s failure to resolve its debt crisis.
The only two Euro-zone members not included in S&P’s negative watch were Greece, already facing default after its bond ratings were previously lowered, and Cyprus, currently near junk-bond status. The warning from the New York-based credit rating agency came shortly after French President Nicolas Sarkozy and German Chancellor Angela Merkel proposed changes to the European Union treaty to centralize spending and borrowing decisions among members.
Down-rating any of the six Euro-zone members with prized AAA ratings—including France and Germany—also would trigger a cut in the AAA rating of the EU European Financial Stability Facility (EFSF) bailout fund, S&P officials said.
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “It’s not a surprise to see France on downgrade-watch; it was more of a surprise to see Germany added to the list.” He also noted, “If most countries are on a one-notch downgrade-watch, France is on for a two-notch downgrade-watch.”
Jakob said, “The question to which we do not have the answer yet is: how to you leverage the EFSF if the countries that guarantee it lose their AAA status? With the European Central Bank meeting [on Dec. 8] and the European Council meeting [on Dec. 9], we are up for many more European headlines, rumors, etc.”—all with the potential to affect energy prices.
S&P warned that if the outcome of the Dec. 9 meeting is not positive, it could quickly impose the downgrades. “It is similar to the tactic S&P used on the US in August, where S&P downgraded the US 3 days after the debt ceiling failure [by the Congressional ‘super-committee], which prompted a sharp sell-off in the market,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.
In the Dec. 5 market, Zhang said, “Oil ended the day largely unchanged as optimism on a resolution over the Euro-zone debt crisis was dampened by S&P’s negative outlook on the credit of the Euro-zone’s sovereign debt.” He said, “Oil products were directionless while waiting for the weekly oil inventory data. The term structures for both Brent and West Texas Intermediate were broadly unchanged, while price differentials for high-sulfur crude remained strong.”
Jakob said, “Trading volume in crude oil (both WTI and Brent) was light yesterday, and they traded without any strong technical conviction. In light volume, the simple lines usually hold, and yesterday was no exception. WTI found some support just before $100/bbl but could not test the previous closing highs—$102.59/bbl compared to [an intraday] high of $102.44 $/bbl on Dec. 5. The slope of the 5-day moving average in WTI is starting to flatten, and if $100/bbl cannot hold as a support, then we will have to target the 200-day moving average ($96/bbl) as the next important line of support.”
Meanwhile, equity research analysts at Pritchard Capital Partners LLC reported the Asian Development Bank cut its forecast of China 2012 gross domestic product to 8.8% from 9.1% previously. The analysts said, “Economic weakness since 2008 suggests current demand for oil in the developed world is unlikely to diminish much more. This makes Asia the wildcard to oil demand, and a hard landing almost a requirement for much lower oil prices.”
Diesel, gasoline markets
Analysts at Barclays Capital Commodity Research observed, “Record high appetite for diesel has supported global oil demand despite macroeconomic adversities. On the other hand, gasoline demand has been weak, weighed down by high oil prices and weaker economic growth. Rarely has the divergence between gasoline and diesel been this stark.”
Reasons for the strength in diesel demand “are many and diverse: strong oil demand growth from China, India, Latin America, Africa, Eastern Europe, and the Middle East; continued usage of diesel in power generation at the margin; strong rail and truck movement buoyed by robust internal trade; and vast levels of unforeseen refinery shutdowns, particularly in Asia, have all played a part,” said Barclays Capital analysts. “The seasonal upswing in the Middle East and Latin America is coming to an end and while the Northern Hemisphere winter is set to be the determining factor, current weather forecasts point to a rather benign winter, which should allow inventories to build, especially against a backdrop of refineries maximizing their distillate yields and the return of key refineries following the outages seen earlier in the year.”
They reported, “Mitigating this weakness is the potential pickup in Rhine River levels, which is likely to provide strong support for European demand. Currently, low water levels have increased the cost of barges substantially, with consumers running down their stocks to critically low levels. Overall inventories remain very low, and weather anomalies aside, we continue to foresee a tight balance in 2012.”
The rapidly rising Rhine “should translate into cheaper freight rates from Rotterdam to the inland markets of Germany and Switzerland and allow greater volumes of distillates to move from stocks in Rotterdam to stocks in Germany,” Jakob reported. “While this could create some additional prompt demand in the European pricing hub, we need to keep in mind that the German consumer stocks are well covered and that the temperatures so far in the winter have been above average. Still, the higher water levels should translate in some bottoming action for the European diesel premiums while stocks are readjusted from Amsterdam, Rotterdam, and Antwerp to inland.”
He added, “The US Gulf Coast refineries will be in need of a pick-up in the European distillate premiums because for now their processing margins are going…down. The early closure of Markus Hook refinery on the US East Coast is making the headlines, but at current economics we expect to see some refinery run cuts on the Gulf Coast as well. On the other hand, Jakob said, “We need to keep in mind that the Gulf Coast will see some major expansion of refining capacity in the first quarter of 2012 with the new units at the Motiva refinery. The export refineries of the US Gulf will need further shutdowns of European refining capacity; and that might come through an EU-wide ban on Iranian crude oil.”
Barclays Capital analysts said, “Gasoline demand has been the Achilles’ heel of Organization for Economic Cooperation and Development [members’] oil demand, with US gasoline demand having fallen 4% year-over-year in 2011’s driving season. An abundance of naphtha, together with a refining complex geared far more towards producing gasoline than distillates globally, means gasoline balances have looked heavy for a couple of months now.”
However, they said, “Moving into next year, we warn against continuing with this bearish sentiment towards gasoline. With our base-case scenario of fairly stable oil prices, the year-over-year change in retail US gasoline prices should be far more moderate and is likely to be supportive of domestic demand. A recovery in Asian petrochemical demand is in the cards, in our view, and could easily tighten up naphtha balances like in 2010.
Most importantly though, a plethora of shutdowns in US East Coast refineries due to poor margins tilts the supply-demand balance quite heavily towards the latter. With Sunoco’s Markus Hook refinery closed permanently last week, and with a potential loss of almost 1 million b/d of refining capacity in the region by the third quarter of next year, we foresee some significant tightness for gasoline ahead. Imports will have to rise and prices will have to do the bulk of the work from current levels to encourage higher refinery runs.”
Energy prices
The January contract for benchmark US sweet, light crudes traded at $100.24-102.44/bbl Dec. 5 on the New York Mercantile Exchange before closing at $100.99/bbl, up 3¢ for the day. The February contract increased 4¢ to $101.13/bbl. On the US spot market, WTI at Cushing, Okla., was up 3¢ to $100.99/bbl, still in step with the front-month futures contract.
Heating oil for January delivery inched up 0.24¢ but closed essentially unchanged at a rounded $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.25¢ to $2.61/gal.
The January natural gas contract dropped 12.3¢ to $3.46/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 4.2¢ to $3.41/MMbtu.
In London, the January IPE contract for North Sea Brent lost 13¢ to $109.81/bbl. Gas oil for December climbed $13.25 to $964.50/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 69¢ to $110.35/bbl.
Contact Sam Fletcher at [email protected].
