MARKET WATCH: Energy prices decline in uncertain market

The front-month natural gas futures contract dropped 1.8% Jan. 9 on the New York market with forecasts of warm weather for the East Coast. Oil prices were down modestly with European problems still tainting the market outlook for demand.

“The oil market was weaker yesterday as general market sentiment was soured by the intransigent Euro-zone debt crisis,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products, however, continued to make gains amid problems in the refining industry. Brent structure weakened sharply, but remained in backwardation, while West Texas Intermediate structure was broadly unchanged.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The flat price of crude oil has been trading a small range the last 4 days, torn between the risk of supply disruption and the risk of demand destruction.”

He said, “Ever since the strange alleged Iranian plot to assassinate the Saudi ambassador to Washington, Iran and the West have been engaged in a continued escalation that has no clear exit solution apart from war. The announcement yesterday of Iran that it has now moved its enrichment facility deep in the mountains of Qom will be a further step in that escalation process. The US aircraft carrier USS Vinson has now joined the USS Stennis in the 5th Fleet area (the area that covers the Arabian Sea and the Persian Gulf). The USS Lincoln is currently in Thailand on its way to the 5th Fleet, and it will now be very important to see whether the USS Stennis sails back to the US as per the original schedule or stays a bit longer in the 5th Fleet. Two US aircraft carriers in the 5th Fleet is already a crowd; having three will make Iran very, very nervous. Meanwhile the UK is sending for its first mission its brand new stealth Destroyer HMS Daring to the Persian Gulf (the HMS Daring supposedly has the world’s most sophisticated naval radar system, able to track at the same time all sorts of flying objects).”

Jakob observed, “One of the risks with Saudi Arabia trying to replace Iran supplies while the West imposes an embargo is that the conflict starts to degenerate into a greater conflict between Iran and Saudi Arabia. We should not forget that the initial start of the Iraqi attack on Kuwait had something to do with Kuwait over-producing and taking the market shares of Iraq.” Iran might take the same attitude toward Saudi Arabia, especially after the “proxy” conflict between the two governments last March in Bahrain.

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts noted US legislation enacted Dec. 31, 2011, makes it more difficult for lifters of Iranian oil to pay for their purchases. Also, the European Union subsequently reached a preliminary agreement among its members for an embargo of Iranian crude embargo. “All this threatens a backlash from the Islamic republic whose leaders have become increasingly shrill in their rhetoric in recent weeks. Iran has already said it will hold a new round of war games in the gulf from Jan. 21,” they said.

However, KBC analysts said, “The EU has yet to announce a date for the embargo to go into effect, and agreeing on the details will not be plain sailing. Italy has asked for an exemption, and others such as Greece are understood to be urging a slow phasing in of the embargo, rather than a guillotine. Any such import ban would add to that imposed on Syria due to Damascus’ response to unrest in that country.”

Zhang said, “The EU is reported to bring forward its decision over Iranian oil imports to Jan. 23. An embargo on Iranian oil appears to be certain, which is likely to tighten the European crude market and push prices higher.”

Meanwhile, US Sec. of the Treasury Timothy Geithner is scheduled to visit China and Japan to discuss the latest US sanctions on Iran. KBC analysts said, “Iran says that, in the face of an EU embargo and US sanctions, it is ready to ship its oil to China and other Asian countries as well as Africa. Such importers will drive a hard bargain. China has already cut its imports from Iran and has been busily buying up cargoes from elsewhere to replace these.”

Strait of Hormuz

Iran has threatened to retaliate by blocking the Hormuz Strait, but few knowledgeable analysts take that as a given. “Iran’s few allies are among its main crude buyers, [and] Iran depends on oil for three quarters of its revenue,” KBC analysts said. “During its long 1980-88 war with Iraq, exports from the gulf producers kept flowing, and despite the so-called tanker war, Iran at no stage tried to block the Strait of Hormuz for the simple reason that it needed oil revenue to pay for the war effort. Nevertheless, the noose appears to be tightening and countries are generally at their most unpredictable when under threat, so it is impossible to rule out retaliation of some sort by Iran. Forecasting prices under such scenarios is notoriously difficult and usually will get the consultant involved quoted in the press as having predicted that oil prices will actually rise to $200/bbl (or whatever other round numbers seem plausible at the time). We therefore give the following views with caution. A possible response by Iran would be to proactively announce a cessation of oil exports to Europe. If this happened, a price spike similar to that in early 2011 is likely, as refiners seek to secure alternative supplies. Because the volumes involved are smaller, however, and Iran’s crude is poorer in quality than Libya’s light, sweet grades, we would not expect prices to rise much above $120/bbl on Brent.”

Jakob said, “While we focus a lot on the [potential] closure of the Strait of Hormuz, we need to keep in mind that it is still relatively easy to have some local bombings of pipelines in Iraq, especially since the political situation in that country is currently a bit tense and terrorist bombings still an almost daily act (three car bombs yesterday in Baghdad). If internal fighting slows the flow of crude from Iraq, then Saudi Arabia is stuck on its spare capacity potential, and Iran regains an edge without using its option on the Strait of Hormuz. And in the meantime we still have to keep an eye on Nigeria for a possible escalation in street protests against the price of gasoline and growing unrest between the north and the south regions.”

In other news, Jakob said, “Chinese imports of crude oil in December were 250,000 b/d higher than a year ago and make for an average [increase] of 286,000 b/d for the whole of 2011 vs. 2010. The oil prices of 2011 were not the result of a Chinese pull but of a supply disruption in Libya, and for the prices of 2012 it is again the geopolitics that will be the main input, not China. The growth of Chinese crude oil import demand was in 2011 at the slowest level of the last 6 years.”

With little sign of improvement in business conditions for Petroplus Holdings AG, the shutdown and throughput reduction of its European refineries could last a prolonged period, possibly leading to a permanent shutdown of some refineries or a sell-off. “Consequently, European refining margins received a temporary boost from Petroplus’s woes, with both cracking margins and hydroskimming margins rallying over the past few weeks. However, we are not expecting the strength to last as product demand is still lackluster. More importantly, there remains plenty of spare capacity in the European refining system, and we expect other refineries to pick up the supply gap left by Petroplus. The strength in product cracks should be sold into,” Zhang advised.

Warm winter so far this year in many parts of the North Hemisphere has reduced heating demand for middle-distillates. “December was warmer than normal by 13%, losing 290,000 b/d of heating oil demand for the month. This warmer-than-expected winter has arrested the sharp decline in distillate inventories we saw during autumn, another factor which usually weighs on refining margins,” Zhang said.

Energy prices

The February contract for benchmark US sweet, light crudes dropped another 25¢—the same loss as in the previous session—to $101.31/bbl Jan. 9 on the New York Mercantile Exchange. The March contract continued its decline, giving up 26¢ to $101.52/bbl. On the US spot market, WTI at Cushing, Okla., was down 25¢ to $101.31 in tandem with the front-month futures contract.

Heating oil for February delivery inched up 0.28¢ but closed essentially unchanged at a rounded $3.07/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 0.74¢ to $2.76/gal.

The February natural gas contract gave back most of its gain from the previous session, down 5.1¢ to $3.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., regained 3.5¢ to $2.90/MMbtu.

In London, the February IPE contract for North Sea Brent lost 61¢ to $112.45/bbl. Gas oil for January decreased $1.75 to $959/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 28¢ to $112.51/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

Statoil reduces capital budget by $2 billion following 4Q losses

02/06/2015 Statoil ASA has reduced its organic capital expenditure to $18 billion in 2015 from $20 billion in 2014. The move comes on the heels of a fourth qu...

Chinese regulators approve Sinopec’s plan for grassroots refinery

02/06/2015 China’s National Development and Reform Commission (NDRC) has approved Sinopec Beijing Yanshan Petrochemical Co. Ltd., a subsidiary of China Nation...

BOEM schedules public meetings about draft proposed 5-year OCS plan

02/06/2015 The US Bureau of Ocean Energy Management will hold the first of 20 public meetings in Washington on Feb. 9 to receive public comments on potential ...

Union strike ongoing at US refineries as negotiations continue

02/06/2015 A strike by union workers at nine US refining and petrochemical production plants remains under way as the United Steelworkers Union (USW) continue...

NCOC lets $1.8-billion pipeline contract for Kashagan field

02/06/2015 North Caspian Operating Co. (NCOC) has let a $1.8-billion engineering and construction contract to ERSAI Caspian Contractor LLC, a subsidiary of Sa...

AOPL releases 2015 safety performance and strategic planning report

02/06/2015 The Association of Oil Pipe Lines is committed to further improvements despite a 99.99% safe petroleum liquids delivery rate, AOPL Pres. and Chief ...

MARKET WATCH: NYMEX oil price bounces back up somewhat

02/06/2015 Crude oil prices on the New York market bounced up $2/bbl to settle slightly above $50/bbl Feb. 5. The positive momentum continued during early Jan...

Congressional Republicans renew bid to halt sue-and-settle maneuvers

02/05/2015 Calling it an affront to regulatory accountability that results in unchecked compliance burdens, US Sen. Charles E. Grassley (R-Iowa) and US Rep. D...

Oil-price collapse may aggravate producing nations’ other problems

02/05/2015 The recent global crude-oil price plunge could be aggravating underlying problems in Mexico, Colombia, and other Western Hemisphere producing natio...
White Papers

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by
Available Webcasts

On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected