The front-month crude contract dipped below $97/bbl in a mixed New York market Feb. 6, but front-month natural gas rebound 1.9% on forecasts of colder weather across the US.
“The oil market was firm again yesterday but not the West Texas Intermediate market,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. The price spread between WTI and North Sea Brent crude widened in both the Feb. 6 session and early trading Feb. 7 as cold weather in much of Europe buoyed Brent.
“By contrast, the gasoline crack was squeezed as it failed to keep up with the rally in Brent or middle-distillates. The term structure of WTI at the front end of the curve fell hard, while the Brent structure held firm and the gas oil time spread jumped,” Zhang reported.
He said, “Price actions in Brent during the last few days, particularly actions around market-close windows, suggest an influx of investment flow into the Brent market. We believe there has been new money allocated and invested into the market at the beginning of the month, which should become evident in the upcoming weekly ICE commitment of traders report due early next week. The new investment flow has been driving the prices while brushing aside most of other factors in the market, which we expect to continue this week.”
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “If there is one party [that] is partly enjoying the surge of the Brent-WTI spread, it is Iran as the increase in Brent is offsetting in its budget a large part of the export volumetric loss to Europe. This being said, shutting down the financial system around Iran is starting to bite. It is, however, starting to develop into a de facto total embargo, which also includes food. As a side note, the financial embargo on Iran is also starting to be a live experiment in working outside of the euro and dollar systems, which is going to be interesting for the development of the emergence of India and China.”
Jakob said, “The Brent-WTI spread does its own thing, but at some stage we will have to focus less on the Brent-WTI spread per se and more on the pure economics of Brent. For now Brent in dollars per barrel is priced higher than March of last year and in euros per barrel is higher than at the peak of the Libyan war.”
With the recent Siberian-like winter weather across Europe, Jakob said, “The heating oil furnaces…are burning at full blast, and given that January was warmer than normal we can safely estimate that in Europe we are currently burning about 400,000-500,000 b/d more than last month.” However, December and January were not particularly cold in Europe. “Hence stocks have not been pulled before February, and we do not really know how the European consumer will react to the current price environment,” Jakob said. “When the water of the Rhine rose in December, it did not bring any pent-up demand, and if heating oil is being currently burned, we can still have a scenario where the consumer plays draw-down into the end of the winter. However, if temperatures are expected to come down from the current extreme levels, it does look like it will remain a winter month in Europe until the end of the month. The water levels on the Rhine are also starting to recede again, not yet to a worrying level but something that we are starting to put back on our radar screen.”
In other news, Zhang said, “It was reported this morning that China will raise its domestic prices for gasoline and diesel [effective] Feb. 8 and for the first time in 10 months. This should incentivize higher run rates from domestic refineries, thereby boosting crude oil imports. The flip-side of the price increase is that it will push up inflation, which the government has been fighting against during the last year, and high prices will inevitably slow down demand growth. Therefore, we see this as short-term bullish news for the Brent market.”
He reiterated, “China will be increasingly important to the global oil market, as the US’s influence is diminishing.”
Structural shifts in US market
Zhang said, “The US consumes over one fifth of global petroleum production, more than twice as much as that of the second-largest consumer, China. For many years, the strength of the US oil market has been the barometer of the health of the global oil market. However, two major shifts have taken place in the US oil market, which should reduce the influence of the US on the global oil market.”
He said, “US oil consumption, led by gasoline, has declined materially and will fall further due to high prices and improved vehicle fuel efficiency. US demand for gasoline during 2011 was tracking the bottom end of its 5-year range or setting record lows for most of last year. For January of this year, gasoline demand in the US was setting new seasonal record lows again. Although the weekly data is subject to revision, it is clear that the declining trend in US gasoline demand continues.”
Moreover, Zhang said, “US oil imports have also been falling materially.” In 2010, US oil imports were below 5-year average levels and dropped lower in 2011 to new 5-year lows. “Again, in the past month, the import levels set new seasonal record lows. This shift has been driven by a combination of declining oil demand and rising domestic crude oil production,” he said.
Zhang said, “We expect the two structural shifts in the US oil market—declining demand and falling imports—to continue. Consequently, oil exporter and oil prices will have to rely more on the demand growth from emerging market economies, which are inherently more volatile.”
Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. said, “As the Mar. 20 Greek debt redemption date inches closer, investors and European leaders are becoming increasingly wary of the country's inability to take proper action. French and German leaders continued to put pressure on Greece by reiterating that the €130 billion bailout would not be disbursed if Greece does not meet the austerity measures laid out by the Troika [the European Commission, European Central Bank, and International Monetary Fund]. Greece was able to meet at least one of the requests by agreeing to cut 15,000 public sector jobs by the end of 2012. The Standard & Poor’s 500 Index, which traded flat over the session, didn't jump on the news as there are still several austerity measure requirements that the debt-laden country must meet.”
Raymond James analysts also noted, “Since late last week, Bakken crude prices have blown out to a discount of over $20/bbl vs. benchmark WTI prices, or absolute prices of sub-$75/bbl. In our view, many investors are failing to fully recognize the inherent seasonality in Bakken crude prices. At present, Midwest and Rockies refineries are stepping into turn-around season and are thus the primary reason Bakken spreads have weakened (same story for other inland crudes as well). How long will this last? We'd argue that Bakken spreads are seasonal, and this should remain the case throughout this year and possibly longer.”
The March contract for benchmark US sweet, light crudes dropped 93¢ Feb. 6 to $96.91/bbl on the New York Mercantile Exchange. The April contract fell 82¢ to $97.41/bbl. On the US spot market, WTI at Cushing, Okla., was in lock-step with the front month futures contract, down 93¢ to $96.91/bbl.
Heating oil for March delivery gained 5.63¢ to $3.17/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 1.35¢ to $2.93/gal.
The March natural gas contract regained 5.1¢ to $2.55/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to climb, up 7¢ to $2.48/MMbtu.
In London, the March IPE contract for North Sea Brent rose $1.35 to $115.93/bbl. Gas oil for February escalated $28.75 to $988.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased to $113.41/bbl Feb. 6 from $111.27/bbl on Feb. 3. So far this year, OPEC’s basket price has averaged $111.72/bbl.
Contact Sam Fletcher at email@example.com.