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MARKET WATCH: Energy prices decline as European crisis worsens

In an appropriate Friday the 13th wave of bad news, energy prices continued a general downward spiral at the end of last week ahead of Standard & Poor's Financial Services LLC’s downgrade of credit ratings of nine Euro-zone countries, stripping France and Austria of prime triple-A status.

By Jan. 16, the euro had fallen to an 11-year low against the yen and continued its 6-week decline against the US dollar ahead of a scheduled series of sovereign-debt auctions by European countries, beginning today with France. S&P lowered by two notches the credit ratings of Italy, Spain, Portugal, and Cyprus and reduced France, Austria, Malta, Slovakia, and Slovenia one notch each.

Meanwhile, negotiations of a debt swap in Greece between government officials and private creditors ended without agreement. Unless some settlement is reached, the Greek economy could virtually collapse and perhaps take the rest of Europe down with it.

On the other hand, fear of supply disruptions were reported to push up oil prices in early trading in other markets Jan. 16, although US markets were closed for the holiday celebrating the birthday of civil rights activist Martin Luther King Jr.

Iran reportedly warned its Arab neighbors Jan. 15 that it will hold them “accountable” if they increase production to offset an embargo of Iranian crude.

Riots continued over the weekend in urban areas of Nigeria, but union leaders suspended strikes Jan. 16 after President Goodluck Jonathan offered to restore some of the previous state subsidies to lower fuel costs to consumers.

While the US stock market managed to “hold pretty well” in late trading Jan. 13, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The S&P downgrade was expected, and the French bond yields were already pricing France out of the triple-A club. S&P has not lifted all the uncertainty yet as it still needs to review the rating of the European Financial Stability Facility; that should be done in the coming days. The EFSF is at a significant risk of losing its triple-A status, and that will make it harder or more expensive for the EFSF to issue rescue bonds. Portugal moves to the junk bond category. Germany holds on to its triple-A, but if it needs to increase its commitment to the EFSF to counter the French loss of its triple-A, then its own AAA could also be in danger. The European crisis is far from over, and the amounts at the European Central Bank deposit facility have made a series of all-time record highs during the week.”

Although the S&P downgrades made the biggest headlines, Jakob said, the failure of negotiations for restructuring of Greek debt is probably the greatest risk. “A new meeting should take place Jan. 18, but as the haircuts being asked from the private sector are increasing, we are getting closer and closer to a disorderly default. The combination of the breakdown in the Greek debt discussions and of the S&P downgrades is not a good one for the euro-dollar [valuation],” he said.

“The surge in prices for oil products in euros will be a growing problem for the European Commission and is a factor that could lead the European Commission to write enough loopholes in the proposal for an embargo on Iranian crude oil to allow a kick-the-can to later days,” said Jakob.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Meanwhile, fuel oil cracks remained very strong. Refining margins were fairly healthy, which should underpin demand for physical crude oil. However, the term structures of crude and products at the front end of the curves have been softening in recent days, indicating lackluster prompt demand.” He reported net losses last week of $2.86/bbl for front-month West Texas Intermediate and $2.62/bbl for Brent amid investors’ concerns over the Euro-zone crisis.

Energy prices

The February contract for benchmark US light, sweet crudes declined 40¢ to $98.70/bbl Jan. 13 on the New York Mercantile Exchange. The March contract decreased 43¢ to $98.88/bbl. The NYMEX floor was closed Nov. 16. On the US spot market, WTI at Cushing, Okla., was down 40¢ to $98.70/bbl, in step with the front-month futures contract.

Heating oil for February delivery retreated 2.69¢ to $3.02/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.29¢ but closed essentially unchanged at a rounded $2.73/gal.

The February natural gas contract dropped 2.7¢ to $2.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 3.8¢ and also closed at $2.67/MMbtu.

In London, the February IPE contract for North Sea Brent gave up 82¢ to $110.44/bbl. The new front-month February contract for gas oil lost $20 to $952.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes fell $1.18 to $111.75/bbl. Since the start of 2012, the OPEC basket price has averaged $112.16/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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