Energy prices declined across the board Jan. 30 with the front-month crude contract again temporarily cresting the $100/bbl barrier in the New York market, before closing at a 1% loss. Natural gas was down 1.5% in the futures market, but escalated in the cash spot market.
“Oil prices weakened slightly in a relatively quiet trading day,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. The reformulated stock for oxygenate blending (RBOB) crack fell, ending its recent sharp rally. “Distillate cracks were little changed yesterday but received some boost today from a cold spell in Europe,” Zhang reported. “Term structures for both West Texas Intermediate and Brent were stable, with some boost to Brent structure from the shutdown of BP PLC’s Foinaven field. In addition, it has been reported the Buzzard field is experiencing production problems, resulting in two February Forties cargoes being delayed.”
In a late Jan. 30 session, 25 of the 27 European Union governments agreed to a pact aimed at preventing member nations from racking up unsustainable debts. “Unfortunately, Greece ran into that problem long ago, and its talks regarding a ‘voluntary’ 50% debt write-down remain unresolved,” said analysts in the Houston office of Raymond James & Associates Inc. “With the uncertainty surrounding Europe and in particular Greece, investors remained hesitant as broader indices traded flat on the day.”
The fiscal pact at the conclusion of the EU summit is “likely to have little bearing on the market, at least for the short term,” said Zhang. “The situation in Portugal looks increasingly precarious, as the yield of its 10-year bond has exceeded 16%—a clearly unsustainable level.” He said, “Portugal is likely to be pushed into needing another bailout—possibly a debt restructuring.”
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The EU leaders agreed as expected that next time they will be more careful with the budgets. The Greek debt restructuring still needs to be approved (anytime soon, but that has been the case forever), and we continue to watch the yields on the bonds of Portugal surging to new record highs. This being said, the European media is currently providing more coverage of Siberia than of Portugal given the cold wave that is descending on Europe. The extreme cold is expected to recede…next week, but it will still be a change [from] the above-normal [temperatures] seen so far this winter.”
As for technical trading, Jakob said, “There is still nothing at all to write about. There is no trend, no volatility, no volume; crude oil continues to trade a very small range around $100/bbl. The moving averages are not showing any momentum.” He sets market price resistance for crude at $100/bbl in the New York market and basic support at $99.20/bbl before declining to $98.30/bbl and $97.60/bbl.
In other news, Zhang reported, “The recent message from Iran over the latest International Atomic Energy Agency visit hints that Iran is more open to talks over its nuclear situation. As we have been reiterating, the risk was overblown as military action over Iran or a closure of the Strait of Hormuz are events at the very long end of the tail. In East Africa, the talk between Sudan and South Sudan has broken down but is to resume next month and has resulted in a release of seized cargoes by Sudan. A production shutdown will be a lose-lose situation for both countries.”
The 2012 market
Zhang said, “The oil market started off the New Year with heightened concerns over so-called tail risks. It was understandable as an imminent supply disruption from both Iran and Nigeria appeared to be a real threat just a couple of weeks ago, driven by an US sanction over Iran and a nationwide strike in Nigeria respectively. On the demand side, global economy growth is believed to be lagging as the Euro-zone debt crisis drags on.”
However, he said, “In contrast, oil prices have been fairly stable during the first month of this New Year. More importantly, the options market seems to have dismissed much of the concerns over both supply and demand.” Price volatility for the front-month WTI futures contract continues with its declining trend since the fourth quarter.
“The short-term supply situation for the global crude oil market has much improved since the beginning of this year, compared with much of the last half of 2011,” said Zhang. “This is reflected in the forward curves of the Brent futures market. Backwardation at the frontend of the Brent curve has flattened substantially during the past 3 months, reflecting a more balanced market.”
Market movements in the past month have been “rather painful for market participants who hold long volatility positions in order to capture potential rewards from tail risks.” Zhang said. “This has in turn probably contributed to intraday volatility as these group market participants try to offset the losses through gamma hedging.”
Nevertheless, he said, “The oil market is constantly facing risks of supply disruptions as many oil-rich regions remain unstable, which could easily trigger the volatility to spike again. In addition, volatility also has the tendency of mean-reversion. Therefore, at the current level of volatility, we would shy away from strategies that aggressively short volatility.”
The March contract for benchmark US sweet, light crudes dropped 78¢ to $98.78/bbl Jan. 30 on the New York Mercantile Exchange. The April contract fell 79¢ to $99.12/bbl. On the US spot market, WTI at Cushing, Okla., was down 78¢ to $98.78/bbl.
Heating oil for February delivery decreased 1.86¢ to $3.05/gal on NYMEX. RBOB for the same month lost 5.61¢ to $2.87/gal.
The new front-month March natural gas contract decreased 4.3¢ to $2.71/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 16.1¢ to $2.75/MMbtu.
In London, the March IPE contract for North Sea Brent was down 71¢ to $110.75/bbl. Gas oil for February lost $1 to $952.75/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 20¢ to $111.11/bbl.
Contact Sam Fletcher at firstname.lastname@example.org.