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MARKET WATCH: Iran, Greek concerns boost crude oil prices

The front-month contract for crude oil soared above $106/bbl in a late rally Feb. 21 in the New York market before closing slightly lower. Natural gas fell, however, ending a two-session resurgence.

Oil prices escalated as International Atomic Energy Agency officials left Iran without gaining access to the country’s nuclear site.

“West Texas Intermediate match-12 futures contracts expired yesterday at the highest price in more than 9 months,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. In the London market, front-month Brent also rose to its highest level in 9 months but without posting as sharp an increase as did WTI.

“The Brent structure jumped again, which appeared to be led by the rally in the flat price as price differentials for physical crude cargoes continued to weaken. Oil products managed to catch up with the crude rally, resulting in stable refining margins for now,” Zhang reported.

He said, “We still believe that the rally in Brent prices is overstretched. The latest softness in physical crude differentials and a pause in the Brent structure rally signal that the rally in the flat price might have gotten ahead of the physical market, and therefore a correction is due. Meanwhile, demand is likely to be seriously dented as oil prices in euro and sterling are around their all-time highs. With regard to investment money flow, open interest in the Brent futures market appeared to be reaching a plateau, which might suggest that buying power is waning. On balance, we see substantially more downside risk in Brent than upside in the next few weeks.”

The equity market initially was buoyant in the Feb. 21 session with the Dow Jones Industrial Average Index hitting the 13,000 mark for the first time in more than 3 years following the latest European Union agreement for a second bailout for Greece. But the optimism and the Dow Jones peak didn’t last.

Fitch Ratings Ltd. on Feb. 22 downgraded Greece’s bonds to CCC junk status, from its previous reduction to C. Fitch officials said Greece is “highly likely” to default soon, following the bond swap agreement to write off €107 billion ($141 billion) of Greek government bonds held by banks and other private investors.

Also, the Euro-zone Purchasing Manager Index (PMI) report fell short of market expectations on both manufacturing and service, “which suggests that the economic woes in the Euro-zone might last longer than originally anticipated,” Zhang said.

“Oil supply from Iran remains the center of attention for oil market participants,” said Zhang. “With the geopolitical risk of a possible military conflict rising again, the oil market traded nervously. A military strike over Iran will inevitably be accompanied by inventory release by the International Energy Agency, both of which will send price volatility spiking.”

In terms of euros per barrel, “the price impact of the EU sanctions on Iran is greater than the impact of the total shutdown of Libya last year and the price spike is going to be a political challenge for politicians in the West running for reelection,” predicted Olivier Jakob at Petromatrix in Zug, Switzerland. “Last year, the Organization for Economic Cooperation and Development countries managed to cap prices by releasing strategic stocks, but that is much harder to do this year because there is no supply disruption per se but instead a voluntary restriction on buying from a specific country.”

Furthermore, he said, “The EU thought that they would replace Iranian barrels with Russian barrels, but China has taken those barrels for themselves. China imports from Libya are increasing and were higher than a year ago (before the start of the Libyan war).”

Meanwhile, the latest report of US vehicle miles of travel indicates “that the Department of Energy’s implied gasoline demand is understated due to an overestimate of gasoline exports, but it remains that we are moving deeper into price levels that will have an impact on consumer demand and behavior,” Jakob said. “The spring will see very close to an average of $4/gal at the pump on the US East Coast. The US consumer has experienced $4/gal for only short period of times last year and in 2008, and that will still be a flag for this season, simply because we have for now not been able to prove the sustainability of economic growth in the Northern Atlantic Basin at current gasoline or diesel prices.”

The DOE’s weekly report on commercial US oil inventories will be delayed until Feb. 23 because of the Presidents Day holiday this week.

Energy prices

The March contract for benchmark US light, sweet crudes climbed as high as $106.07/bbl Feb. 21 before closing at $105.84/bbl, up $3.53 on the New York Mercantile Exchange. The April contract jumped $3.61 to $106.75/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.53 to $105.84/bbl.

Heating oil for March delivery gained 2.96¢ to $3.07/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 2.31¢ to $3.07/gal.

The March natural gas contract fell 5.8¢ to $2.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 5.1¢ to $2.62/MMbtu.

In London, the April IPE contract for North Sea Brent increased $1.61 to $121.66/bbl Gas oil for March advanced $1.50 to $1,013.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was unchanged at $119.20/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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