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MARKET WATCH: Energy prices rise as confrontation with Iran intensifies

The front-month crude contract increased 0.5% Jan. 4 to the highest closing price since May 2011 in the New York market ahead of possible European Union action against Iran. Natural gas rallied 4% on forecasts of colder weather.

“Oil products were stronger too and are supporting relatively strong refining margins,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“Media reports last night confirmed that the EU has reached a decision in principle to impose an embargo on Iranian crude oil. There is a political consensus, though details (e.g., exceptions for existing contracts and future review provisions) are being finalized. A formal announcement is expected Jan. 30 when EU foreign ministers meet to discuss the issue,” said analysts in the Houston office of Raymond James & Associates Inc.

“An embargo would stop Iran's current sales of 450,000 b/d (30% of its crude exports) to European customers, so alternative buyers would have to be found, presumably at a discounted price,” Raymond James analysts said. Iran “is fully aware of the economic impact and has been aggressively trying to prevent the embargo,” they said. “In particular, there have been multiple threats to block the Strait of Hormuz in the event that the embargo is imposed or sanctions are intensified otherwise.”

They said, “While the threats may well be saber-rattling—given that a blockade of Hormuz would cripple Iran's crude exports as well as its refined product imports—the market's fear of such a scenario is palpable, hence the recent strength in crude prices.”

Meanwhile, Iran's parliament indicated it is preparing legislation to prohibit all foreign warships from entering the Persian Gulf unless they receive permission from the Iranian navy (OGJ Online, Dec. 4, 2012).

The Pentagon press secretary responded that closure of the strategically important strait “will not be tolerated,” and the US will not alter deployment plans for its warships in the Persian Gulf.

Barclays Capital Research analysts noted, “The US Fifth Fleet based in Bahrain consists of more than 20 ships supported by combat aircraft, with more than 15,000 personnel on the vessels and another 1,000 on land. A spokesman for the fleet told Reuters that it ‘maintains a robust presence in the region to deter or counter destabilizing activities,’ and US military officials contend that the fleet would be able to keep the strait open in the event of a military conflict with Iran. The Fifth Fleet would likely be given additional air support from the forward headquarters of US Central Command at Al Udeid Air Base in Qatar. US State Department officials have dismissed the latest round of Iranian threats as bluster, and several leading Iran experts have noted that Iran would face severe economic fallout from closing the strait.”

Nevertheless, the global oil market is already stressed. “Latest data shows that China has cut its oil imports from Iran by more than half in January and could extend the cut next month. The oil market should be concerned that there are few others who would comfortably step up their oil purchases from Iran as China cuts back its purchases. To bridge this import gap, Asian refineries have seen buying North Sea crude oil, and the arbitrage from Europe to Asia has become profitable,” Zhang said.

“As traditional buyers of Iranian oil step away, some Iranian supply has effectively been taken out the market, which will keep the oil price heated,” said Zhang. “However, the Euro-zone debt crisis carries significant downside risk, as the euro is testing a previous low. A collapse in the euro would certainly drag oil down with it.”

Zhang also sees “a number of relief factors for the market. First, Saudi appears willing to step up its production for import countries to replace Iranian oil. Secondly, Libya’s crude production continues to ramp up.” However, Saudi Arabia’s 2 million b/d spare capacity is smaller than Iran's 2.5 million b/d export level. “More importantly, the spare capacity is untested. Consequently, the current situation and any further deterioration warrant a higher oil price,” Zhang said.

US inventories

The Energy Information Administration said Jan. 5 commercial US crude inventories increased 2.2 million bbl to 329.7 million bbl in the week ended Dec. 30, countering the Wall Street consensus for a 1 million bbl draw. Gasoline stocks gained 2.5 million bbl to 220.2 million bbl, above average for the time of year. That exceeded market expectations of a 1 million bbl increase. Finished gasoline inventories decreased while blending components increased. Distillate fuel inventories gained 3.2 million bbl to 143.6 million bbl; analysts had expected a 1 million bbl gain.

Imports of crude into the US increased 34,000 b/d to 9 million b/d last week. In the 4 weeks through Dec. 30, US crude imports averaged 8.5 million b/d, up 56,000 b/d from the comparable period in 2011. Gasoline imports last week averaged 734,000 b/d while distillate fuel imports averaged 229,000 b/d.

The input of crude into US refineries increased 171,000 b/d to 14.8 million b/d last week with units operating at 85% of capacity. Gasoline production decreased to 8.9 million b/d. Distillate fuel production decreased to 4.8 million b/d.

EIA also reported the withdrawal of 76 bcf of natural gas in US underground storage in the week ended Dec. 30. That left 3.47 tcf of working gas in storage, up by 356 bcf from the comparable period a year ago and 458 bcf above the 5-year average.

Energy prices

The February and March contracts for benchmark US sweet, light crudes increased 26¢ each to $103.22/bbl and $103.40/bbl, respectively, Jan. 4 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., also was up 26¢ to $103.22/bbl, matching the February futures price.

Heating oil for February delivery climbed 5.17¢ to $3.09/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 3.66¢ to $2.79/gal.

The February natural gas contract rose 10.3¢ to $3.10/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $2.97/MMbtu.

In London, the February IPE contract for North Sea Brent advanced $1.57 to $113.70/bbl. Gas oil for January escalated $11.25 to $964.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $2.33 to $111.73/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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