The front-month crude contract posted a modest loss Feb. 14 in the New York market when an end-of-session rally failed to lift it out of the red. However, natural gas regained 4.4% on the prospect of greater utility turnarounds.
The crude market rallied “as a top contender in Greece's next election seemed ready to support recent austerity measures,” said analysts in the Houston office of Raymond James & Associates Inc. Crude prices were higher in early trading Feb. 15 amid supply concerns in the Middle East, and natural gas also was up.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market was mixed yesterday as reasonably robust oil market fundamentals were confronted by the uncertainties of the macroeconomic environment.” He reported, “The Brent structure remained firm with the first and second month spread continuing to strengthen due to production problems in the North Sea and more supply disruptions from broader geographic areas such as South Sudan and Yemen.”
Zhang reported the recent shutdown of a syncrude facility in Canada could slow the inventory build in Cushing in the coming weeks.
Tight North Sea crude supply continues to support Brent pricing, widening the West Texas Intermediate-Brent price spreads. Crude loading and lifting data from the North Sea indicates a potential decline in March, the third in as many months. “Falling North Sea production isn't at all surprising for a region in a steady state of decline, but maintenance and delayed shipments exacerbate the issue,” Raymond James analysts reported. “We saw similar trends last year as well. The near-term tightness in North Sea crude supplies and increased heating oil demand from recent cold weather in Europe has put a bid under Brent prices, while refinery maintenance in the US is putting downward pressure on land-locked WTI prices. The combination has driven the recent widening of the Brent-WTI spread, which currently sits at $17/bbl.”
In other news, Raymond James analysts reported marine insurance for tankers exporting crude from Iran will become “ineffective” Feb. 20. “This is exclusively for Iranian crude and does not pertain to vessels within the Strait of Hormuz exporting crude from other countries,” they said. “Companies can bear the risk and carry crude from Iran; however, if an accident would happen to occur, this will void the marine insurance for other vessels. For example, if a company owns 10 vessels and one is contracted with Iran, should an accident occur [to that one] it would void insurance for all 10 vessels.” That, they said, is “a strong incentive” for tankers not to load crude at Iran’s export terminals.
Meanwhile, a Feb. 15 report showed the Euro-zone’s gross domestic product contracted in the fourth quarter, “but at a less severe pace than what the market had expected,” Zhang said. France registered 0.2% growth during last quarter while the market had expected a small contraction. Zhang said, “The GDP numbers more than offset the negative sentiment over what appears to be another delay over the restructuring of Greek debt. Euro-group financial ministers delayed their meeting in Brussels today and are holding a teleconference instead amid skepticism over Greece’s commitment to austerity measures.”
For now, he said, “The upside in oil prices is limited by its negative impact on global economic growth. While geopolitical risk in the major oil supply region remains high, the probability of a major supply disruption remains low. On balance, there is significantly more downside than upside risk to the Brent price in the short term. Product cracks and refining margins will continue to be eroded as high prices erode demand for oil products. Now is the ideal time for producer hedging, as the strong rally in the flat prices and low volatility present an opportunity for inexpensive downside protection.”
Refining outlook
Analysts with Barclays Capital in London reported, “Marred by high crude oil prices and lower margins, closure of simple refineries [within member countries of the Organization for Economic Cooperation and Development] has finally started to gain some traction. Almost 1 million b/d of refining capacity is going to be lost in the US by the middle of this year, while the bankruptcy of Petroplus Holdings AG takes out further European capacity. While refining margins globally have received a significant boost from this transformation, we do not believe the strength will last. Seasonal uptick aside and beyond a large-scale loss of refining capacity, global margins are likely to track historical averages. There is enough capacity globally (current and scheduled) to meet incremental product demand growth and, in our view, any strength beyond that seasonality should be sold into.”
They said, “Though the OECD refinery closures have gathered pace, they remain small relative to the refinery additions in the non-OECD. Indeed, after adjusting for these closures, net capacity addition in 2011 and 2012 is a combined 4 million b/d, resulting in an overcapacity of almost 2 million b/d by the end of the year.
However, Barclays Capital analysts said, “Challenges for refineries do not simply end with mere capacity additions; they also must adapt to a rapidly changing crude slate, which is getting lighter due to the growth of oil shales and NGLs. This comes at a time when global upgrading capacity and installation of coker units are at a record high and refineries around the world have invested heavily to process heavy, sour grades. This is likely to compress light-heavy differentials significantly over the coming years, rendering many large capital investments undertaken by refineries to upgrade rather futile.”
Distillate demand is expected to be “well supported” this year and to be “once again” the “incremental demand barrel, given robust rail and trucking activity in the US, restocking in Europe, and the usual structural factors in the non-OECD,” Barclays Capital analysts said. “However, with global refineries ready to meet this incremental demand, unless temporary outages similar to last year were to occur, distillate cracks are unlikely to see significant upside.”
Although US gasoline demand remains weak, an improving economy and labor market along with “more benign price changes” could result in “slightly better” demand this year,” they said.
US inventories
The Energy Information Administration said Feb. 15 commercial inventories of US benchmark crude dipped 200,000 bbl to 339.1 million bbl in the week ended Feb. 10, compared with Wall Street’s consensus for an increase of 1.1 million bbl. Gasoline stocks increased 400,000 bbl to 232.2 million bbl in the same period, short of the 700,000 bbl build analysts had expected. Finished gasoline increased while blending components decreased. Distillate fuel inventories dropped 2.9 million bbl to 143.7 bbl, more than the expected 1.1 million bbl decline. Total commercial petroleum inventories were down 4 million bbl last week.
Imports of crude into the US were up 343,000 b/d to 8.8 million b/d last week, EIA reported. In the 4 weeks through Feb. 10, US crude imports averaged 8.7 million b/d, down 168,000 b/d from the comparable period in 2011. Gasoline imports last week averaged 548,000 b/d while distillate fuel imports averaged 132,000 b/d.
However, the input of crude into US refineries increased 322,000 b/d to 14.7 million b/d last week with units operating at 84% of capacity. Gasoline production increased to 8.8 million b/d while distillate fuel production decreased to just under 4.4 million b/d.
Energy prices
The March contract for benchmark US light, sweet crudes climbed as high as $101.84/bbl in intraday trading Feb. 14 before closing at $100.74/bbl, down 17¢ for the day on the New York Mercantile Exchange. The April contract lost 21¢ to $101.08/bbl. On the US spot market, WTI at Cushing, Okla., was down 17¢ to $100.74/bbl in lockstep with the front-month futures contract.
Heating oil for March delivery inched up 0.48¢ but closed essentially unchanged at a rounded $3.16/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 3¢ to $2.98/gal.
However, the March natural gas contract jumped 10.1¢ to $2.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 8.5¢ to $2.52/MMbtu.
In London, the March IPE contract for North Sea Brent increased 23¢ to $118.16/bbl. Gas oil for March decreased $4.25 to $992.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 56¢ to $116.63/bbl.
Contact Sam Fletcher at [email protected].
