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MARKET WATCH: Energy prices plunge as European economy falters

Prices for energy and other commodities along with corporate stocks plunged Dec. 14, with the front-month crude contract dropping more than $5/bbl in the New York market as the European financial crisis intensified.

“With the euro falling to an 11-month low against the US dollar and Italian bond yields surging past 7% (yet again), the ‘risk-off’ trade was in full effect,” said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “As we approach the last trading days of 2011, we need to continue having a strong watch on the euro-dollar [valuations], as it is also taking the Standard & Poor’s 500 Index with it, and we still face a risk of further deleveraging.”

He said, “The French government, which previously was saying that it would not let France lose its AAA [credit rating], is now more and more trying to downplay the significance of such a potential loss. This increases the perception that France will soon lose its S&P AAA [rating], and when that happens it will have some spill-over into the European Financial Stability Facility and other magical constructions that were built on the assumption that France would not lose its top credit-rating.”

OPEC

The Dec. 14 decision by ministers of the Organization of Petroleum Exporting Countries to raise their official production quota to their current output of 30 million b/d without detailing members’ allocations had little effect on the markets.

Jakob said, “The outcome of the meeting was pretty much as we expected, i.e. a formal but meaningless exercise of quoting a 30 million b/d global quota. The situation after the meeting is the same as before the meeting: Saudi Arabia will increase or decrease production according to demand and adjusting for Libya. The real quota discussion will only be for next June. And then, with Iraq in 2012 having the presidency of the OPEC conference in an US election year, we are not sure that OPEC will be pushing for hostile supply management unless there is a much more severe flat price reduction.”

OPEC’s failure to assign new production allocations “is understandable as it is difficult to predict the exact production level from Libya in the coming months,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Most OPEC members already are producing at maximum capacity. The decision effectively gives Saudi Arabia control of total OPEC supply, Zhang said. “It should not be surprising if the Saudis had promised the more hawkish members that Saudi Arabia would cut production if prices fell below $100/bbl,” he said.

Barclays Capital Research analysts said, “Since the overthrow of Moammar Gadhafi, Libyan volumes have begun to return to the market, with production currently about 500,000-600,000 b/d. With OPEC agreeing to set a new output target at 30 million b/d, broadly in line with the secretariat’s call on OPEC crude for next year, some adjustments to current production allocation between member states will have to be made. Contrary to market belief, we expect no change in key participants’ desire to defend prices at close to current levels. Hence, Saudi Arabia’s willingness to continue to act as the swing producer at the margin is not diminished, in our view.”

Zhang noted, “Despite the sharp sell-off in flat prices, the term structure for Brent crude rallied to a 2-week high, which clearly stated that the flat price moves were not driven by oil market supply and demand.”

The gasoline market “suffered the added pressure from a bearish inventory number from the US, while distillates fared better as US distillate inventories remained broadly flat. Given the flat price moves, volatility shot up, and is likely to stay elevated due to the Euro-zone uncertainty,” he said.

US inventories

The Energy Information Administration reported the withdrawal of 102 bcf of natural gas from US underground storage in the week ended Dec. 9. That left a little more than 3.7 tcf of working gas in storage—154 bcf more than year-ago levels and 347 bcf above the 5-year average.

EIA earlier said 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 (OGJ Online, Dec. 14, 2011).

Energy prices

The January contract for benchmark US sweet, light crudes fell $5.19 to $94.95/bbl Dec. 14 on the New York Mercantile Exchange. The February contract dropped $5.18 to $95.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., remained in lockstep with the front-month futures contract price, down $5.19 to $94.95/bbl.

Heating oil for January delivery declined 9.89¢ to $2.83/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 12.17¢ to $2.50/gal.

The January natural gas contract tumbled 14.3¢ to $3.14/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 4.3¢ to $3.07/MMbtu.

In London, the January IPE contract for North Sea Brent was down $4.48 to $105.02/bbl. Gas oil for January dropped $27.75 to $904.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes declined 77¢ to $106.88/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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