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MARKET WATCH: Oil prices fall as EU delays embargo

Energy prices continued to drop Jan. 12, with $100/bbl switching from a level of support to the first line of resistance for the front-month crude contract on the New York market. The fall followed reports European Union members will wait 6 months to activate an embargo of Iranian crude.

“Oil initially climbed higher as the strike in Nigeria escalated but then suffered a heavy sell-off later in the day,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products held up better than crude, resulting in stronger refinery margins. Term structures were generally softer due to the sell-off in flat prices.”

With the oil field workers’ union in Nigeria threatening to halt all production on Jan. 15, Zhang said, “We are optimistic that some compromise is likely to be struck between the government and the union to avoid a complete shutdown. We therefore expect muted risk-taking in the oil market today.”

The euro continued to weaken against the dollar. As a result of that trend, the US Department of Commerce said Jan. 13 that US exports to Europe dropped nearly 6% in November. Europe, the market for 20% of commercial US exports, may already be in another recession, officials said. The US trade deficit increased 10.4% to $47.8 billion in November on higher prices for imported oil and a 0.9% decline to $117.8 billion in total exports.

“Natural gas continued its slump, falling 2% after the weekly Energy Information Administration storage report further increased the year-to-year surplus,” said analysts in the Houston office of Raymond James & Associates Inc. Corporate stock prices “remained flat as the markets appeared to look past not-so-stellar weekly readings on unemployment, retail sales, and business inventories and [focused] on the upcoming earnings season and successful bond sales in Europe. Energy stocks, which led the markets south in early trading, failed to break even along with the rest of the group,” they said. The Oil Service Index and SIG Oil Exploration & Production Index each fell 1% on weaker commodity prices.

EIA reported the withdrawal of 95 bcf of natural gas from US underground storage during the week ended Jan. 6, exceeding Wall Street’s consensus for an 89 bcf draw. That left 3.38 tcf of working gas in storage—398 bcf more than in the comparable period a year ago and 491 bcf above the 5-year average (OGJ Online, Jan. 12, 2012).

Iranian crude

The “bearish risk” of the EU’s 6-month grace period for members to find alternatives to Iranian oil imports “is that the measures also include a small footnote that says the embargo can be reviewed in 6 months before implementation,” said Olivier Jakob at Petromatrix in Zug, Switzerland. He reiterated, “To be effective an embargo on Iran needs to occur at the price sufficient to cover the Saudi budget but hurt Iran revenues, and that is $60-65/bbl or at least closer to the safe consumer-producer equilibrium of $75/bbl. That price would require some serious stock building and a push of oil from Saudi Arabia” (OGJ Online, Jan. 12, 2012).

Jakob said, “The problem for Europe has been the combination of the oil price surge on the announcement of the ill-prepared embargo with the sharp fall in the euro.” In the week ended Jan. 9, he said, “The average retail diesel price in the Euro-zone reached a new all-time record high, above the peak levels of July 2008. The price of crude oil in dollars might be lower than in July 2008, but for the European end-consumer the situation is currently slightly worse than when crude oil was at $147/bbl in July 2008.” He expects high oil prices to have the same negative effect on the European economy today as they did then.

“The recent average European retail price of gasoline was already above the July 2008 levels, but gasoline does not count for much consumption anymore in Europe—diesel does. Having an additional Iranian price premium on top of the current domestic prices will be a gamble for European economic recovery,” Jakob conjectured. “At any other time with current domestic prices, EU officials would be calling for more supply from the Organization of Petroleum Exporting Countries, an International Energy Agency stock release, banning speculators, etc. That is, however, harder to do when calling for an oil embargo of a significant oil supplier to Europe.”

Iran’s Parliament Speaker Ali Larijani said Jan. 12 Iranian officials are ready to negotiate that country’s controversial nuclear program with six world powers in Turkey. “This leaves some room for the EU and US to claim that they have won the first battle, while delaying the embargo for 6 months leaves some room for Iran to claim that they also have won the first battle,” Jakob said. If talks resume and some progress is made, he said, “Then there is a chance that the embargo does not kick-in in 6 months.” He said, “What is still needed to better defuse the tension is an announcement that the aircraft carrier USS Stennis is leaving the region and sailing back to the US.”

Earlier this month, Raymond James slashed fourth quarter 2011 earnings estimates for refiners by an average 35%. On Jan. 13, the analysts said, “We were compelled to once again cut estimates for our independent refining coverage universe, as well as lower our downstream earnings projections for several of the majors. In addition, we highlighted three key refining themes to keep in mind as this quarter continues: 1. the headwinds facing the West Texas Intermediate-Brent crude spread; 2. the drivers behind the recent narrowing of light-heavy crude spreads; and 3. the recent ‘for sale’ signs placed on beachfront refining assets.”

Energy prices

The February contract for benchmark US light, sweet crudes dropped $1.77 to $99.10/bbl Jan. 12 on the New York Mercantile Exchange. The March contract fell $1.78 to $99.31/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.77 to $99.10/bbl.

Heating oil for February delivery declined 1.05¢ to $3.05/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.2¢ to $2.73/gal.

The February natural gas contract lost 7.7¢ to $2.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 7.2¢ and also closed at $2.70/MMbtu.

In London, the February IPE contract for North Sea Brent declined 98¢ to $111.26/bbl. Gas oil for January was unchanged at $977/tonne.

The average price for OPEC’s basket of 12 benchmark crudes rose 3¢ to $112.93/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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