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MARKET WATCH: Crude oil prices decline in mixed market

Crude oil prices continued to decline but natural gas rebound Jan. 27 in the New York futures market with traders still worried about economic problems in the European Union.

Leaders of the 27 EU leaders met in Brussels Jan. 30 to discuss how to stimulate the EU economy while simultaneously tightening spending limits. Greece, the focal point of the crisis, is reportedly closer to an agreement with bondholders to reduce its debt, a prerequisite to getting an additional €130 billion ($170 billion) from the EU bailout fund. Meanwhile, Fitch Ratings Ltd. on Jan. 27 reduced credit ratings for five Euro-zone nations. Italy, Europe's third-largest economy, was reduced two levels to A- from A+. Spain was lowered to A from AA-. Ratings for Belgium, Slovenia, and Cyprus also were cut.

“The oil market was mixed Jan. 27 as a robust physical market was offset by a weaker euro,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“Product cracks and refining margins strengthened further, led by a buoyant gasoline market on the back of refinery outage. The gasoline crack last reached this high back in last year’s summer driving season; which now raises the question of how long the strength will last.”

The front-month futures contracts for West Texas Intermediate and North Sea Brent had net gains last week of $1.10/bbl and $1.60/bbl, respectively. “The sell-off pressure from the previous week was held back by a strong physical market, as refineries rushed to capture strong refining margins,” Zhang reported. “The market was boosted by the Federal Reserve Bank as it reiterated its stance to hold rates at the record low for an extended period. Corporate [earnings] reporting season was net bullish last week, and the economic data from the Euro-zone has shown signs of stabilizing. However, the market continues to be wary of the ongoing negotiation over the Greek debt and the stress in the European financial system.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Greece continues to make the news about its potential agreement on the haircuts with the private sector for its debt obligations. The agreement has been imminent since the start of the year but has still not been produced. On a separate note, Germany is apparently proposing to take control of the Greek budget administration and that the ‘take-over’ needs to be ‘enshrined in national law, preferably through constitutional amendment.’”

According to the Associated Press, German officials suggested over the weekend that Athens temporarily cede control over its taxing and spending to a Euro-zone budget commissioner before it can secure further bailouts. Both the European Commission and the Greek government rejected that proposal.

Meanwhile, Jakob said, “Trading volume is still very low, there is still a lot of doom and gloom talk in the system, but the US stock market is pricing a very upbeat view and, apart from the financial sector, is pricing very close to the peaks of October 2007.

Analysts in the Houston office of Raymond James & Associates Inc. reported, “Last week, the market ended listless as investors continue to digest the fourth quarter gross domestic product data and Fed Chairman [Ben] Bernanke's comments around the ‘possibility’ for a third round of quantitative easing. The broader market eked out a weekly gain of 0.1%, marking its fourth straight weekly gain; however, volumes continue to edge toward the lowest levels since 1999 as investors remain skittish. WTI and natural gas ended the week up 1.3% and 14.3%, respectively, with the EPX [SIG Oil Exploration & Production Index] and OSX [Oil Service Index] following suit, posting a weekly return of 3.7% and 2.4%, respectively. On tap for this week is a slew of economic data as well as more news out of the Eurozone around the Greek debt situation.”

Natural gas

The Jan. 27 rebound in natural gas appeared to have been short-lived, as it was down 1% in early trading Jan. 30.

Raymond James analysts said, “As US natural gas prices have crashed and burned over the past month, energy investors have been selling first and asking questions later. Fear has dominated the energy investment mindset even though most understand drilling activity in the US is significantly more levered to oil prices than natural gas prices.”

They said, “Clearly the remaining ‘dry’ gas rig activity needs to come down; and the cash flows for operators looking to accelerate ‘oily’ liquids activity is likely coming down with lower natural gas prices. On the other hand, the economics for drilling oil and ‘wet’ gas wells remains very strong, which should continue to counteract the declines in gas rig activity.” The analysts explained, “To fully understand all of the moving parts affecting the US drilling outlook, one must fully understand the basin-by-basin rig count trends as well as the bigger picture movements between dry gas, wet gas, and oil-directed activity.”

The analysts said, “It's become obvious that natural gas supply for the lower 48 states has continued to ramp into this winter, with volumes growing 600 MMcfd and 1 bcfd in September and October, respectively. This growth floods an already record inventory picture, with winter ending storage of [more than] 2 tcf on the horizon. The recent publicly announced gassy capex cuts and rig count reductions won't show up in the November data (obviously a lag) but are necessary as we move through the year—you can only cram so much gas into storage.” They advised, “Expect ‘other states’ (i.e. the Marcellus shale) to continue to lead the growth charge while the Gulf of Mexico likely bleeds further. All-in, we're expecting Lower 48 volumes to be up 300-500 MMcfd sequentially or almost 5 bcfd year-over-year.”

At Pritchard Capital Partners LLC, analysts said, “Several large E&P companies, led by Chesapeake Energy Corp., have recently announced plans to do their part to help bring down the natural gas supply glut in the US [by] dropping rigs, not completing wells previously drilled, and shutting in production.” Included, they said, are ConocoPhillips, CONSOL Energy Inc., Occidental Petroleum Corp., Talisman Energy Inc., and EQT Corp.

Pritchard Capital said, “While it is likely premature to expect any significant recovery in gas prices for some time, these moves by large E&Ps to stop growing for growth’s sake may provide some confidence that a bottom is forming. It is likely we will hear of more Capex rationalization from other producers in the coming days. As the trend matures and the conversation shifts from ‘if gas prices will ever recover’ to ‘when they will recover,’ more investors will start kicking the tires of the gassy E&P names. For the time being, there remains too much natural gas in the supply chain, and baby, it needs to get cold outside!”

Energy prices

The March contract for benchmark US light, sweet crudes climbed as high as $100.63/bbl Jan. 27 but still couldn’t maintain above the $100/bbl barrier. It closed at $99.56, down 14¢ for the day on the New York Mercantile Exchange. The April contract dropped 13¢ to $99.91/bbl. On the US spot market, WTI at Cushing, Okla., was down 14¢ to $99.56/bbl.

Heating oil for February delivery increased 1.69¢ to $3.07/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 8.02¢ to $2.93/gal.

The February natural gas contract climbed 7.3¢ to $2.68/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 8¢ to $2.59/MMbtu.

In London, the March IPE contract for North Sea Brent gained 67¢ to $111.46/bbl. Gas oil for February increased $9 to $953.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 5¢ to $111.31/bbl. So far this year, OPEC’s basket price has averaged $107.46/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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