MARKET WATCH: Energy prices rise despite S&P Euro-zone downgrade threat

Stock market and energy prices were up Dec. 6 as investors remained optimistic European Union leaders will pull a debt solution from their collective hat at their Dec. 9 summit and despite Standard & Poor’s threat to downgrade Euro-zone credit ratings if they fail.

The New York oil market even “staged a small rally late yesterday, as new reports surfaced that the EU is moving a step closer to further integration to stem the crisis,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. The front-month natural gas contract increased nearly 1%.

However, US stocks and energy prices were down in early trading Dec. 7 as differences over crafting a debt-crisis remedy emerged among EU members. One German official said it may be Christmas before they can hammer out a deal, but critics claim even that is unlikely.

Chief executives of Germany and France—the two biggest European economies—proposed changing the EU’s founding treaties to allow centralized enforcement of fiscal discipline on members, with details of such a move yet to be worked out (OGJ Online, Dec. 6, 2011).

Nonetheless, Zhang said, “We expect the summit to reach an agreement on the Franco-German plan, and we don’t expect S&P to carry out its threat to downgrade the Euro-zone’s sovereign debt. Another rate cut is expected from the European Central Bank meeting tomorrow. Both could tempt some modest risk-on moves. As we approach yearend, activity in the markets is tailing off, but with a bias for a positive close for December. In addition, if the EU summit decides on an EU-wide embargo on Iranian crude, the oil price and term structures will strengthen, putting further pressure on European refining margins.”

France and Germany, which import little or no crude from Iran, are pushing such a ban, but skeptics say southern European nations who are more dependent on Iranian crude are unlikely to go along.

Zhang said, “Gasoline came under pressure again as the American Petroleum Institute reported a huge inventory build, while distillate crack seemed to have found a floor, as US demand for distillates picked up again. The term structures for West Texas Intermediate and Brent were little changed, with increased intraday volatility expected as the index funds start their monthly rolls from today.”

US inventories

API reported Dec. 6 crude inventories at Cushing, Okla., fell 1.2 million bbl, “which is likely to strengthen the front-end of the WTI curve,” Zhang said. “The hefty draw in crude inventories was largely driven by a jump in total US refining runs, which grew 3.3% [week-on-week] as the autumn maintenance season comes to an end.”

The Energy Information Administration said Dec. 7 commercial US inventories of crude increased by 1.3 million bbl to 336.1 million bbl in the week ended Dec. 2, opposite the Wall Street consensus for a 1.3 million bbl decline. Gasoline stocks jumped by 5.1 million bbl to 215 million bbl, exceeding market expectations of a 900,000 bbl gain. Both finished gasoline and blending components increased last week. Distillate fuel inventories climbed 2.5 million bbl to 141 million bbl, more than double traders’ outlook for a 1.2 million bbl increase.

Imports of crude into the US increased 375,000 b/d to 9.4 million b/d last week. In the 4 weeks through Dec. 2, crude imports averaged 8.8 million b/d, up 249,000 b/d from the comparable period last year. Gasoline imports last week averaged 820,000 b/d, while imports of distillate fuel averaged 198,000 b/d, EIA reported.

It said input of crude into US refineries increased 682,000 b/d to 15.2 million b/d last week with units operating at 87.7% of capacity. Gasoline production decreased to 9.1 million b/d and distillate fuel production increased to 5 million b/d.

In its monthly report published Dec. 6, EIA reduced its 2012 forecast for global oil demand by 100,000 b/d and raised its forecast for non-OPEC oil production by 30,000 b/d. “The numbers are marginal when compared to the swing production that Saudi Arabia controls,” said Zhang. “Therefore, they are of little consequence in determining global oil market balance. Instead, Saudi’s willingness to supply the market has been the key to keep the oil price in check for the most part of this year. In fact, Saudi announced that they produced just over 10 million b/d during November. The flip side of the situation is that Saudi’s spare capacity is diminishing fast, which could mean increased impact from supply disruptions in the future.”

In other news, analysts in the Houston office of Raymond James & Associates Inc. reported Nustar Energy LP was to restart its 14,500 b/d San Antonio refinery that was shut down last week by a fire Nov. 30 when a contractor accidentally dislodged a ¾-in. valve within a crude unit.

Energy prices

The January contract for benchmark US light, sweet crudes traded in a narrow range Dec. 6 before closing at $101.28/bbl, up 29¢ for the day on the New York Mercantile Exchange. The February contract rose 32¢ to $101.45/bbl. On the US spot market, WTI at Cushing was up 29¢ to $101.28/bbl.

Heating oil for January delivery increased 2.93¢ to $3.02/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced 3.17¢ to $2.65/gal.

The January natural gas contract gained 2.6¢ to $3.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.1¢ but closed essentially unchanged at a rounded $3.41/MMbtu.

In London, the January IPE contract for North Sea Brent was up $1 to $110.81/bbl. Gas oil for December fell $6.25 to $958.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes continued to waffle, down 73¢ to $109.62/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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