MARKET WATCH: Oil prices rebound in New York; gas futures price drops again

Oil prices rebounded Feb. 3 after the US Department of Labor reported unemployment has fallen to 8.3%—the lowest level since February 2009. But natural gas gave back a sizeable portion of the previous session’s gain in the New York market.

However, the price of crude and the Standard & Poor’s 500 index were down while gas increased in early trading Feb. 6 after negotiations on austerity reform in Greece again were suspended over the weekend. That continues the danger that Greece may not receive its next bailout payment from other European Union members and will be forced to default on its sovereign debt by mid-March.

“If negotiations are this tough for Greece, just imagine the fiasco if an economy of Italy's size were the point of contingency,” said analysts in the Houston office of Raymond James & Associates Inc.

The price spread between West Texas Intermediate and the higher-priced North Sea Brent continued to widen last week “as the Brent market attracts more bullish bets than the WTI market,” reported James Zhang at Standard New York Securities Inc., the Standard Bank Group. There was a net loss of $1.72/bbl for the front-month WTI futures contract last week, compared with a net gain of $3.12/bbl for front-month Brent.

“The weakness in WTI was reflected in the technical pattern of its price actions and a bearish US inventory report. A delay of the planned reversal of the Seaway Pipeline announced last week has also caused the weakness to transmit further down the WTI curve, with the WTI June-December spread falling over $3/bbl since the beginning of January. In contrast, Brent was supported by supply disruptions from Sudan and geopolitical concerns over Iran. However, as the strength in Brent held up, refining margins were further eroded,” Zhang said.

He said, “Oil products followed the crude market up but failed to catch up to Brent, resulting in slightly weaker product cracks and refining margins. Term structures of both WTI and Brent were firmer, lifted by moves in flat prices.”

The retreat of oil prices in early trading Dec. 6 apparently was “driven by profit-taking after the rally last week,” Zhang surmised. “German factory orders came in better than expected this morning, another data point suggesting that the Euro-zone economy is stabilizing.” This week the Bank of England is expected to produce more quantitative easing to stimulate that economy. “There is a small chance of the European Central Bank cutting the euro’s benchmark rate. Recent economic data and continuously supportive central bank policies give a risk-on bias to the oil market. In addition, the market is likely to add more risk premium to the oil price because of the situation over Iran and protests inside Russia,” said Zhang

Marc Ground at the Standard Bank Group said, “Given the back-tracking from the previous week’s moves, it would appear as though speculators remain unsure of the direction the oil market will take—as the threat of falling demand on the back of a weakening Euro-zone economy is countered by supply concerns owing to political tensions with Iran.”

‘Messy’ gas supply picture

The current shift of interest and operations to petroleum liquids and away from natural gas is like a painting by Claude Monet, a founder of French impressionist art, said Raymond James analysts: “Up close, it’s just a big mess for gas supply.”

They said, “Checking the pulse of each major basin, we find that US natural supply growth will likely be much more resilient than the market currently believes. Even though we are modeling a significant two-thirds reduction in dry gas-related drilling, overall US gas supply should continue to grow for the foreseeable future. Most interesting is the level of impact that associated gas production from oil and liquids plays will have on supply as operators flock to tap into nongas options.”

Raymond James analysts cautioned, “Expect the recent surge of activity in oil-liquids plays and the Marcellus [shale] to translate into supply growth that should more than offset declines from dry gas plays. We see significant forced gas-production curtailments in the summer of 2012.  At the very least, this should keep a lid on summer gas prices. At the worst, we could see a $1/Mcf handle on Henry Hub gas prices for the first time in decades. Thus, we are lowering our 2012 forecast from $3.25/Mcf to $2.50/Mcf and lowering our 2013 forecast from $4/Mcf to $3.25/Mcf. Long term, we are lowering our forecast from $4.50/Mcf to $4/Mcf.

They also noted Europe is scrambling to manage its gas supply and distribution in the face of extreme cold and disruption of Russian gas exports. “Russia's gas supply to some EU member states has suddenly dropped [as much as] 30% as a result of an increase in Russian gas demand,” the analysts said. “Due to the way Russia's gas contracts are designed, Russia can ship less gas if it is needed for domestic use; thus extreme cold weather in Russia has resulted in fewer shipments to EU members.”

Analysts said, “While the situation has not been elevated to an emergency, the European Commission did place its gas coordination committee on alert at the end of last week. France, which consumed a record high amount of gas last week, has seen its largest gas company draw down reserves to fill the gap from Russian supply. EU countries must hold a 1-month supply of gas as a cushion. Continued gas supply problems with Russia have spurred countries like Poland to encourage the development of natural gas resources by allowing producers to tap domestic shale plays.”

Energy prices

The March contract for benchmark US light, sweet crudes rebound $1.48 to $97.84/bbl, Feb. 3, wiping out the previous session’s loss on the New York Mercantile Exchange. The April contract regained $1.49 to $98.23/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.48 to $97.84/bbl.

Heating oil for March delivery continued to rise, up 6.15¢ to $3.11/gal on NYMEX. Reformulated stock for oxygenate blending for the same month climbed 4.55¢ $2.91/gal.

The March natural gas contract fell 5.5¢ to $2.50/MMbtu on NYMEX, hanging onto most of its gain from the previous session. On the US spot market, gas at Henry Hub, La., continued its advance, up 6.8¢ to $2.41/MMbtu.

In London, the March IPE contract for North Sea Brent escalated $2.51 to $114.58/bbl. Gas oil for February increased $11.75 to $959.50/tonne.

The Organization of Petroleum Exporting Countries in Vienna was closed Feb. 6, so no price update was posted.

Contact Sam Fletcher at samf@ogjonline.com.

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