MARKET WATCH: Crude price slumps as Iranian confrontation eases

Crude prices continued to slump Jan. 19 in the New York market with an apparent easing of tensions between Iran and the West while natural gas burrowed further below $2.50/MMbtu.

“The oil market rallied modestly during the early trading session yesterday, prompted by a stronger euro. However, the strength soon faded as geopolitical risks eased,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The gasoline crack weakened following a hefty inventory build reported by the Department of Energy. By contrast, heating oil cracks strengthened, also driven by the DOE report. The term structure for Brent was firmer yesterday after the recent slide, which might have bottomed out due to low crude inventories globally.”

Meanwhile, the US Navy made sure “everybody including Facebook is aware” the USS Stennis is leaving the Persian Gulf to return to the US, said Olivier Jakob at Petromatrix in Zug, Switzerland. “This still leaves two aircraft carriers in the 5th Fleet (the USS Vinson and the USS Lincoln), but that is not unusual per se, while three aircraft carriers would have been a much stronger message and presence,” he said.

Moreover, Jakob noted that last weekend the US “surprised everybody by cancelling almost at the last minute” a large joint military exercise with Israel in the Middle East. “This is clearly not a normal procedure,” he said.

On the same weekend the US administration delivered a message to Iran through Swiss and Iraqi officials. “The letter was supposedly about making sure that nothing goes wrong in the Strait of Hormuz, but there is some speculation that there could be a second part to the letter about the need to talk,” Jakob said.

Iran recently has spoken in “a softer voice about potential action in the Strait of Hormuz, a voice that was later welcomed by the UAE,” he added. “Iran also claims that it is ready to take part again in nuclear negotiations. All of this does not mean [an] end of all headlines, but at this point it does seem to us that there are some attempts at defusing the situation and some behind-the-scene diplomatic action.”

Jakob reiterated the proposed European Union embargo of Iranian crude “is basically useless until the first review in 3 months” (OGJ Online, Jan. 19, 2012). He said, “If new negotiations are to take place between Iran and the West, then the EU will want to officially announce an embargo, then claim that the negotiations are a result of the announced embargo, and in 3 months the EU will have the option to cancel or not the embargo directive.”

In other news, weighted average prices of diesel and gasoline hit new highs in the Euro-zone in the week ended Jan. 16, topping the previous week’s record. “The leading candidate in the polls for the upcoming French presidential elections, Francois Hollande, is proposing that gasoline prices be capped,” Jakob said. “Even China stopped doing that 3 years ago, and someone might want to point out to him that French refineries are currently shutting down from South to North; but the point is that the high price of oil in euros per liter is starting to grab more headlines.”

US inventories

The DOE’s Energy Information Administration reported commercial US inventories of crude dropped 3.4 million bbl to 331.2 million bbl in the week ended Jan. 13, opposite the Wall Street consensus for a 3 million bbl gain. Gasoline stocks grew by 3.7 million bbl to 227.5 million bbl in the same period, up from analysts’ expected input of 2.4 million bbl. Both finished gasoline and blending components increased. Distillate fuel inventories were up 400,000 bbl to 148 million bbl, far short of market expectations of a 1.4 million bbl increase.

EIA also reported the withdrawal of 87 bcf of natural gas from US underground storage last week, up from the Street consensus for a 85 bcf draw. That left 3.29 tcf of working gas in storage, up 539 bcf from the year-ago level and 566 bcf above the 5-year average (OGJ Online, Jan. 19, 2012).

“Crude inventories at Cushing, Okla., fell sharply by 800,000 bbl, which has pushed the West Texas Intermediate structure much firmer, especially further down the curve. The fall in crude inventories appeared to be driven by a sharp fall in imports, which again is most likely to be part of yearend fluctuation caused by accounting issues,” Zhang reported. “The total US refinery utilization rate fell by 1.9%, while demand for both gasoline and distillates fell by 355,000 b/d and 191,000 b/d respectively, on a 4-week running average basis.”

Following several recently successful Euro-zone bond auctions, Zhang said, “The euro has broken the upper bound resistance of the downward channel established since November. There are tentative signs that the euro might halt from further decline, pending the ongoing negotiation over Greek debt. The equity market has also been boosted by the euro optimism and better-than-expected economic data from the US.”

Nonetheless, he said, “We expect further downward correction in oil prices in the short term. This should be prompted by an easing geopolitical situation in the Middle East, a soft physical oil market, and an upcoming spring refinery maintenance season in the northern hemisphere. That said, fundamentals remain fairly solid in the medium term for the oil market due to tight supply and low inventories.”

Energy prices

The February contract for benchmark US light, sweet crudes declined 20¢ to $100.39/bbl Jan. 19 on the New York Mercantile Exchange. The March contract decreased 22¢ to $100.54/bbl. On the US spot market, WTI at Cushing also was down 20¢ to $100.39/bbl.

Heating oil for February delivery advanced 2.26¢ to $3.04/ gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, dipped 0.96¢ to $2.82/gal.

The February natural gas contract dropped 15¢ to $2.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 13.1¢ to $2.36/MMbtu.

In London, the March IPE contract for North Sea Brent gained 89¢ to $111.55/bbl. Gas oil for February was unchanged at $943.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 19¢ to $111.59/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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