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MARKET WATCH: Energy prices fall in mixed market

Energy prices fell Feb. 10 on a combination of profit-taking from the previous rally and market concerns as negotiations of Greek austerity measures again stalled.

Inaction over the Greek financial crisis triggered the largest 1-day decline in the broader market so far this year, ending 5 consecutive weeks of gains. Over the weekend, however, Greek lawmakers approved austerity measures while violent protests rocked Athens and several buildings—some historic—were destroyed or damaged.

Prices in the broader market and for crude were up in early trading Feb. 13, while natural gas was down.

“The oil market gave back some of the gains, driven by what appeared to be profit-taking ahead of the weekend,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“Oil products followed crude lower, and product cracks and refining margins were squeezed further,” Zhang said. “The spread between Brent and West Teas Intermediate appears to be stabilizing after the very sharp widening in January. The Brent-Dubai spread remained narrow due to better refining margins for heavy high-sulfur crude. The term structure for Brent remains firm, signaling a tight physical market.”

Zhang reported, “A significant amount of new money has been invested into the oil market since the beginning of this month, which is confirmed by two commitment-of-traders reports from the Commodity Futures Trading Commission and the Intercontinental Exchange Inc. (ICE). Money manger’s net length in WTI grew by 5.5% week-over-week (on a futures and options combined basis), according to CFTC. Meanwhile, money managers’ net length in Brent rose . . . around 10%.”

The front-month crude futures contract registered a net gain last week of 83¢/bbl on the New York market, while North Sea Brent had a net gain of $2.73/bbl, “helped by bullish economic data from the US and a buoyant equity market,” Zhang said. “Despite a lack of agreement over Greek debt up until last weekend, the market largely ignored the risk for now. A continuous accommodative stance taken by the major central banks keeps investors in favor of being long commodities. In addition, the oil market is supported by heightened geopolitical risks in the Middle East.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said oil prices surged above $118/bbl last week amid fears Israel will attack Iran’s nuclear facilities. “The price rise was fuelled also by cold weather in much of Europe, signs that Greece may avoid a debt default (although this is still far from certain, despite

the political deal in Athens) and strong buying by European oil companies seeking alternatives to Iranian crude, which they will have to stop importing from July. WTI prices, however, languished at just below $100/bbl, stretching the spread with Brent to $19/bbl,” they said.

KBC analysts said, “Israel’s response, if any, to Iran’s nuclear program is the big wildcard. Israel lost a known quantity in what appears to be an increasingly unstable region when Egyptian President Hosni Mubarak was ousted last summer. Iran, meanwhile, has extended its influence in the region by supporting, and many say backing, Shi’ite groupings in nearby countries. Iraq’s parliament is now dominated

by Shi’ites; in Bahrain, tensions have flared between the ruling Sunni government and the majority Shi’ite population; and Syria, traditionally an ally of Iran, has reached a situation bordering on civil war that has polarized the UN Security Council.”

As a result, they said, “The Middle East as a whole looks politically more unstable than ever, despite the irony that $100/bbl oil prices are leading to increasing affluence in the large [Persian] Gulf oil producers.”

Based on previous history alone, an attack by Israel on Iran’s nuclear facilities cannot be ruled out. But such an attack might not succeed, as “Iran’s nuclear facilities have been moved deep underground,” said KBC analysts. “Israel would lose any moral high ground that its allies might perceive it to currently hold. An attack would also radicalize

Arab opinion. To the surprise of many western pundits, the Arab Spring has strengthened rather than weakened the hand of Islamic groups in countries newly embracing democracy in the region.”

Meanwhile, they said, “The diplomatic stakes have become very high now that the Syrian conflict has polarized the superpowers. This week an Arab league motion condemning Syria was vetoed by Russia and China, and Russia’s foreign minister Sergei Lavrov’s visit to Damascus delivered a clear message that Moscow was not about to give up its close ties with the Assad regime.”

Energy prices

The March contract for benchmark US light, sweet crudes dropped $1.17 to $98.67/bbl Feb. 10 on the New York Mercantile Exchange. The April contract lost $1.21 to $99.03/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.17 to $98.67/bbl.

Heating oil for March delivery declined 2.46¢ to $3.18/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.79¢ to $2.97/gal. 

The March natural gas contract was unchanged at $2.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 3.3¢ $2.53/MMbtu.

In London, the March IPE contract for Brent was down $1.28 to $117.31/bbl. Gas oil for February was unchanged at $997.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 14¢ to $116.41/bbl. So far this year, OPEC’s basket price has averaged $112.26/bbl.

Contact Sam Fletcher at samf@ogjonline.com


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