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MARKET WATCH: Gas prices continue falling compared with small decline for oil

Market pressures produced small reductions in oil prices Jan. 18, except for gasoline, which was buoyed by reports Hovensa LLC—a joint venture of Hess Corp. and Petroleos de Venezuela SA—will convert its St. Croix refinery in the US Virgin Islands to an oil terminal.

Front-month natural gas in the New York market slipped further below $2.50/MMbtu, “and given the more-mild weather forecasts, we don't expect this to improve much anytime soon,” said analysts in the Houston office of Raymond James & Associates Inc.

US President Barack Obama’s second decision to reject a permit for TransCanada Corp.'s proposed Keystone XL pipeline to transport Canadian crude oil to the US Gulf Coast had no direct effect on the energy commodities market, but that didn’t stop analysts and others from commenting. Raymond James analysts compared Obama’s blaming Republican Congressmen for forcing his decision to the actions of “the captain of the ill-fated Italian cruise ship [who] claims that he wanted to help with the evacuation [of passengers] but accidentally fell into a lifeboat.” They said, “The true art of leadership, it seems, is being able to make a decision and pass the buck elsewhere.”

Public reaction to Obama’s decision was divided along the lines of whose ox got gored vs. whose bovine is in the clover. Although Obama denied presidential election-year politics had anything to do with his decision, the executive director of the Energy Action Coalition of “youth-vote organizations” noted the move “comes amidst unprecedented youth vote mobilization”—voters who likely are pro-Obama and antioil.

Canadian government officials expressed “extreme disappointment” with Obama’s decision. Premier Alison Redford said it “does not mean that America will consume one less barrel of oil. What it means is this: America will continue to import oil from jurisdictions with much weaker environmental policies and who do not share the same values as Canadians and Americans.” It also “strengthens our resolve to pursue access to alternative markets,” he said.

To no one’s surprise, Transcanada said it plans to apply for a new pipeline permit along a similar route across the US. Also to no one’s surprise, the US State Department said a new application means a new review process that cannot be expedited.

“Taken all together, the most tangible result of this second Keystone rejection, and likely the objective of opposition Republicans in the first place, is a focal point for their differences with the president on energy, jobs, and regulation that they hope will be important to winning back the White House in November,” said analysts at Pritchard Capital Partners LLC. “Aside from further stratifying proenergy Republicans on the right and carbon-hating environmentalists on the left, Obama’s decision likely redoubles support within Canada to build the Northern Gateway Pipeline to Kitimat [in British Columbia] and export tar sands oil to Asia, although that project is by no means assured of success at the present time.”

In other news, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “It appears that the European Union embargo on Iranian crude oil will have a starting date in July but with a review sometime in April that could push back the embargo if it creates too much hardship for European countries.” He asked, “Now, if you are a refiner with a term contract with Iran, do you start to phase out of your Iranian crude oil imports and replace them with more expensive crude oil knowing that in 3 months there is a chance that the EU reverses its decision of an embargo? If you are an Asian country, do you start to replace cheap Iranian crude oil with a more expensive crude oil knowing that in 3 months your competitors in Europe might finally decide not to embargo? Rational economic behavior says you continue to import as much cheap Iranian crude oil as you can until the time that the EU finally makes a real and final decision on an embargo.”

Also, he said Eni SPA likely will get a waiver for the Iranian crude it receives as payment-in-kind. “We are pretty sure that Greece will be able to get a waiver once they show that nobody is offering them the credit terms that Iran is offering. Hence, while next week the EU is likely to make big headlines about their embargo on Iranian crude oil, we are ready to take off some of the Iranian premium as there are too many loopholes in the European oil embargo proposal,” said Jakob.

He said, “The problem for the [six-member Middle East] Gulf Cooperation Council is that there is not really any lack of crude oil on the water. Saudi Arabia was supposed to cut exports as Libya was coming back; but if Saudi Arabia cuts exports, then it is more difficult to convince the Asian refiners that they should replace Iranian with Saudi barrels. Bottom line: we will have to worry about less Iranian crude oil supply much later in the year, and therefore the current well-supplied conditions in the crude oil market might start to draw more attention.”

Jakob noted, “The physical crude oil markets are better balanced than 6 months ago due to the return of Libya but also due to a series of refinery closures. To the list of refineries being shut cold and turned into storage terminals, we now have to add the Hovensa St. Croix refinery.” Over the last 6 months, up to 1.8 million b/d of refining capacity in the Atlantic Basin has targeted for shutdown this summer. “Add to that 1.2 million b/d more Libyan supply than a year ago, and by the summer we have in the Atlantic Basin a 3 million b/d better-supplied crude oil market than a year ago,” Jakob said.

So much refining capacity shutting down over such a small amount of time is “serious demand destruction.” Jakob said, “The damage done by the 2011 crude oil prices has been extremely severe and in our opinion totally contradicts the statements that economies are fine with $100/bbl oil. This false perception has been a major drag on the global economy since 2008. The math is, however, simple: $100/bbl oil is too high for consumers and that translates into low demand, then low refining margins, then refinery closures.”

US inventories

The Energy Information Administration said Jan. 19 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.

Imports of crude into the US were down 1.6 million b/d to 8.3 million b/d last week. In the 4 weeks through Jan. 13, crude oil imports averaged 9 million b/d, a decrease of 259,000 bbl from the comparable period in 2011. Gasoline imports last week averaged 553,000 b/d, and distillate fuel imports averaged 21,000 b/d.

The input of crude into US refineries was down 352,000 b/d to 14.6 million b/d last week with units operating at 83.7% of capacity. Gasoline production increased to 8.8 million b/d. Distillate fuel production decreased to 4.5 million b/d.

Energy prices

The February contract for benchmark US sweet, light crudes decreased 12¢ to $100.59/bbl Jan. 18 on the New York Mercantile Exchange. The March contract dipped 11¢ to $100.76/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., kept pace with the front-month crude contract, down 12¢ to $100.59/bbl.

Heating oil for February delivery declined 2.38¢ to $3.01/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continued climbing, however, up 5.41¢ to $2.83/gal.

The February natural gas contract continued its retreat, down 1.6¢ to $2.47/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., regained 1.8¢ to $2.49/MMbtu.

In London, the March IPE contract for North Sea Brent lost 87¢ to $110.66/bbl. Gas oil for February continued its decline, down $9.50 to $943.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 46¢ to $111.78/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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