MARKET WATCH: Crude declines in mixed market in 2011's final trading session

The front-month crude contract climbed to $100.16/bbl in intraday trading Dec. 30, 2011, but couldn’t sustain at that level, dipping into the red below $99/bbl for the day in the New York market. Natural gas continued its downward slide.

The biggest development last week “for relative values” was the freezing of the credit lines for the Petroplus Holdings AG refining system in Europe. Olivier Jakob at Petromatrix in Zug, Switzerland, said, “It did not take very long for Petroplus to start shutting down some of its refineries (Belgium, France, and Switzerland), and there is still a high risk that the Petroplus refineries in the UK and Germany also close down (OGJ Online, Dec. 30, 2011).

He said, “The shutdown of 700,000 b/d of refining capacity on the US East Coast was supposed to be a key supply-and-demand input for the first half of 2012, but the closing of the Petroplus system is a double-up on lost refining capacity.”

Jakob noted, “European demand for oil products is suffering due to the combination of record high retail oil prices and high unemployment, but the amount of refining capacity lost in the northern Atlantic Basin is significant and should provide in our opinion a positive support to the product cracks.” He reported, “The latest oil demand for Spain shows gasoline consumption down 8.1% vs. November 2010 while diesel is down 7.6%.” He said November gasoline sales also were down from year-ago levels in France and Italy.

Jakob said, “The other side of the Petroplus coin is that it takes away some more demand for crude oil in the northern Atlantic Basin. Petroplus was a buyer of a mix of Russian and sweet crude oil, and that lost demand will come on top of the lost demand from Conoco and Sunoco [refinery closures] on the East Coast at the same time that the Libyan crude oil production is getting closer to pre-war levels. Following the news of the Petroplus debacle, the Russian crude oil differentials fell off a cliff while differentials for Forties [field crude] also lost the recently added gains. Exports out of Libya’s Es-Sider [terminal] are reported to be restarting, and that is another ‘better than expected’ story out of Libya.”

He said, “The Brent front spread has therefore weakened…and in our opinion will be put under more pressure if exports out of Es-Sider start to increase from the first two tentative cargoes.”

In other news, Iran carried out a military exercise Jan. 2 after US President Barack Obama signed sanctions Dec. 31, 2011, against that country's central bank. Iran is the second-largest producer among the Organization of Petroleum Exporting Countries, with estimated output of 3.6 million b/d. “More importantly, the Strait of Hormuz located between Oman and Iran is by the far the most critical chokepoint for global oil market, with a daily oil flow of almost 17 million bbl in 2011. According to the US Department of Energy, flows through the strait in 2011 were roughly 35% of all seaborne traded oil, or almost 20% of oil traded worldwide,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

2012 outlook

The European debt crisis “remains the main story” as 2012 kicks off, said analysts in the Houston office of Raymond James & Associates Inc. They reported, “Oil gained 8.2% over the year, while natural gas futures were down 32.1% on the year.”

Raymond James analysts said, “For years we've been bearish on US natural gas prices and bullish on global oil prices. That was the right call in 2011—yet again—and we believe it will remain so in 2012. For oil, we find it impossible to make a near-term directional call until the European crisis reaches some resolution, hence our relatively cautious forecast of $92.50/bbl for West Texas Intermediate and $100/bbl for Brent. Long-term fundamentals remain healthy, however; our initial 2013 forecast is $105/bbl WTI and $110/bbl Brent.”

They said, “Huge increases in demand would be needed to rebalance the natural gas market this year, and we just don't think this is realistic. Hence, our 2012 forecast declines to $3.25/Mcf (our third cut within 3 months), and we are initiating a 2013 forecast of $4/Mcf.” As for corporate stocks, they said, “After a year when most energy stocks lagged the broader market, we believe energy stocks are generally poised for gains in 2012.”

Zhang said, “After a rollercoaster 2011, the oil market is facing further volatility in 2012. Geopolitical risk and the Euro-zone debt crisis are likely to remain the two most important themes this year. We are constructive on oil prices, but maintain that volatility will stay elevated. Refining margins are likely to bottom out as excessive capacity is removed.”

Energy prices

The February and March contracts for benchmark US sweet, light crudes dropped 82¢ each to $98.83/bbl and $99/bbl, respectively, Dec. 30 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was down 82¢ to $98.83/bbl in line with the front-month futures price.

Heating oil for January delivery, however, increased 1.75¢ to $2.94/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.62¢ to $2.69/gal.

The February natural gas contract lost 3.8¢ to $2.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 1.6¢ to $2.96/MMbtu.

In London, the February IPE contract for North Sea Brent retreated 63¢ to $107.38/bbl. Gas oil for January gained $2.50 to $924/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 9¢ to $106.84/bbl. OPEC’s basket price averaged $107.46/bbl for 2011, up from $77.45/bbl in 2010.

Contact Sam Fletcher at samf@ogjonline.com.

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