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MARKET WATCH: European worries influence oil prices

The price of the front-month crude contract slipped lower Jan. 6 in the New York market as traders shrugged off a favorable US Department of Labor report and focused instead on the continuing economic crisis in Europe.

The US Bureau of Labor Statistics reported nonfarm payroll employment rose by 200,000 in December, with the unemployment rate dipping to 8.5%. Job gains occurred in transportation and warehousing, retail trade (up seasonally with holiday buying), manufacturing, health care, and mining, which also includes oil and gas exploration and production.

“Despite a positive jobs report, the broader markets ended the day marginally lower primarily driven by Italian bond yields rising above the critical 7% mark. Additionally, the euro traded below $1.27 for the first time since September 2010. Due to the ongoing events in Europe, reports surfaced over the weekend that the Chinese government plans to cut its economic growth forecast from 8% to 7%,” said analysts in the Houston office of Raymond James & Associates Inc.

Markets declined in early trading Jan. 9 after German Chancellor Angela Merkel indicated Greece may not get its second infusion of bailout funds unless the government and private creditors quickly agree to restructure the Greek national debt. In October, Euro-zone members agreed to a second bailout of the Greek economy providing private creditors write-off 50% of their holdings of Greek debt.

Meanwhile, James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported petroleum product prices increased due to the uncertain future of Petroplus Holdings AG, Europe’s largest independent refiner in Europe. “The scale-back of crude purchase from Petroplus [apparently] also weighed on the term structure of Brent. In addition, the temporary boost to the Brent market from the arbitrage to Asia is waning. Nevertheless, the physical market remains fairly tight,” he said.

Front-month contracts for West Texas Intermediate and North Sea Brent had net increases last week of $2.73/bbl and $5.68/bbl, respectively, “driven by geopolitical tensions and positive US economic data,” Zhang reported. “A weak set of US oil inventory data was largely ignored. But oil was held back to some extent by an increasingly soft euro. Brent outperformed WTI as the market expects the spread between WTI and Brent to widen when the major commodity indices switch a significant portion of WTI holding into Brent this week.”

Zhang said the European Central Bank likely will further reduce the euro’s benchmark rate later this week. The action “should induce further weakness to the signal currency,” he said. “At the moment, the only significant bearish factor for the oil market is a declining euro. Physical oil market remained tight. Although the shutdown of three refineries by Petroplus has seen Brent structure softening, the rather strong refining margins will prompt other refineries to raise throughput to plug the gap.”

Energy prices

The February contract for benchmark US light, sweet crudes dipped 25¢ to $101.56/bbl Jan. 6 on the New York Mercantile Exchange. The March contract declined 22¢ to $101.78/bbl. On the US spot market, WTI at Cushing, Okla., was down 25¢ to $101.56/bbl.

Heating oil for February delivery advanced 3.14¢ to $3.07/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 1.51¢ to $2.71/gal.

The February natural gas contract gained 8.2¢ to $3.06/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., decreased 4.3¢ to $2.87/MMbtu.

In London, the February IPE contract for North Sea Brent was up 32¢ to $113.06/bbl. Gas oil for January lost $5.75 to $960.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 77¢ to $112.23/bbl. In the first week of 2012, OPEC’s basket price averaged $111.59/bbl, compared with an average $107.46/bbl for all of 2011.

Contact Sam Fletcher at samf@ogjonline.com.


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