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MARKET WATCH: Gas prices rise as Chesapeake Energy reduces production

Natural gas prices escalated 7.6% to penetrate the $3/MMbtu barrier Jan. 23 in the New York market after Chesapeake Energy Corp. said it will cut gas exploration and production because of too-low prices. Crude traded up 1.3% but couldn’t maintain its intraday rise above $100/bbl.

“Natural gas futures found some support on the news that US producers are starting to shut some drilling capacity. If that move is extended, then it means more drilling equipment leaving dry gas and going instead into drilling for liquids,” said Olivier Jakob at Petromatrix in Zug, Switzerland.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “The oil market strengthened yesterday on a stronger euro and optimism in the equity markets. The news that the European Union is pressing ahead with an oil embargo over Iran also added to the bullish sentiment, but to a lesser degree due to the planned delay in implementation.”

He said, “The oil product market was mixed, with gasoline weakening and distillates tracking crude.” The financial woes of Petroplus Holdings AG, Europe’s largest independent refiner, buoyed product cracks and refining margins while maintain pressure on the term structure for Brent amid weak demand.

On Jan. 24, Petroplus filed for bankruptcy protection and shut down the last two of its five refineries after failing to sustain its revolving credit facility. The two operating plants it closed were “its principal asset in the UK, the 180,000 b/d Coryton refinery (a key component of fuel supplies to southern England) and the profitable 100,000 b/d Ingolstadt plant in Germany,” said analysts at Barclays Capital. “The total tally of Petroplus’ closures is now 600,000 b/d and comes at a time when almost 900,000 b/d of [East Coast] US refineries are shutting down, along with the closure of the 500,000 b/d (operating at 350,000 b/d) St. Croix refinery in the US Virgin Islands,” they said.

“Overall, closure of almost 2 million b/d of nameplate capacity (operational capacity was clearly lower as utilization rates were near 70%) does provide a breather to the otherwise ailing refinery margins and helps to erase almost all of the current 1.5 million b/d overcapacity in the market,” said Barclays Capital analysts. However, capacity additions in countries outside the Organization for Economic Cooperation and Development are expected to continue at a record pace. Additions in China and India alone total 4 million b/d this year, far outpacing expected global oil demand growth of 1.2 million b/d. “Thus, more OECD refinery closures will be required to balance the market,” the analysts said. With crude prices likely to remain high, they expect additional closures of “simple, nonprofitable refineries” in the US and Europe.

Meanwhile, Jakob at Petromatrix reported, “Gasoline consumption in Italy in December was 9.5% below last year, and January is probably not going to be so good either given that roads were blocked yesterday by truck drivers protesting the high price of fuel.” The strike may extend to Jan. 27, “which also means no resupply to retail stations.” The combination of government austerity plans and record high gasoline and diesel prices in euros per liter “is not going to be good for European oil consumption and the overall economic stability of southern Europe,” he predicted.

In other news, the International Monetary Fund predicted a recession in Europe this year that will slow the global economy and urged governments to focus on economic growth rather than budget cuts. However, analysts in the Houston office of Raymond James & Associates Inc. said, “Greek debt negotiations continue to drag on as the parties cannot come to an agreement on an acceptable interest rate.”

Jakob regards the EU embargo of Iranian crude with a July start date as inconsequential. “In the global balances, nothing is really changing for Europe because the oil demand destruction it is currently suffering from is greater than the amount of Iranian crude oil that it is importing,” he said. “Europe is currently suffering from about 530,000 b/d of demand destruction compared to a year ago (October). This compares to 670,000 b/d of Petroplus refining capacity going bankrupt, which in turn compares to 430,000 b/d of European crude oil imports from Iran (October).”

However, he said, “In the micro balances, it does not work that easily as the petrol stations around London still need to be supplied by someone, and the Petroplus refining system was not running on Iranian crude oil. The crude oil molecules going into the Petroplus system were more expensive than those going into the Greek refineries, and that will remain a risk for the refineries of southern Europe that will have to go through a higher cost of input when replacing Iranian crude oil.”

Embargo of Iranian crude will reduce the effectiveness of the Organization of Petroleum Exporting Countries and place a greater burden on Saudi Arabia, Jakob claimed. Saudi Arabia is supposed to reduce production to make room for Libyan crude coming back to market, not to provide political support for embargos. If the price of crude falls, the Saudis “can forget getting help from [non-members of Cooperation Council for the Arab States of the Gulf] to curb production and control prices. Saudi Arabia will have to do the job alone the next time it wants to create a floor for prices, and that will not be so good for refineries that will increase their term contracts with Saudi Arabia to replace Iranian crude oil,” he said.

Although benchmark crude prices seem relatively strong, the European oil market has been under substantial pressure for months from a weakening euro and a struggling European refining sector.

“The euro started a downward trend vs. the US dollar in November. The euro-dollar exchange rate fell from above $1.40 at the beginning of November to as low as $1.2626 last week,” Zhang said. “Consequently, the front-month Brent futures contracts priced in euro hit a level (€87.77/bbl) fairly close to the all-time record high (€93.07/bbl) reached back in June 2008. Over the last few days, technically, the euro has broken out of the downward channel and rebounded to the $1.30 level. Nevertheless, the euro is unlikely to recover to the $1.40 level any time soon. Consequently, a vicious circle that high oil prices could damage economic growth and therefore dampen oil demand, could hit the European crude market quite hard.”

Energy prices

The new front-month March contract for benchmark US sweet, light crudes regained $1.25 to $99.58/bbl Jan. 23 on the New York Mercantile Exchange. The April contract reclaimed $1.21 to $99.86/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., dipped 28¢ to $98.18/bbl.

Heating oil for February delivery increased 2.14¢ to $3.01/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continued to slip lower, however, down 0.65¢ to $2.78/gal.

The February natural gas contract continued its rally, up 18.2¢ to $2.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 6.8¢ to $2.32/MMbtu.

In London, the March IPE contract for North Sea Brent increased 72¢ to $110.58/bbl. Gas oil for February gained $4 to $937/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 41¢ to $111.78/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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