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MARKET WATCH: Political, economic issues pull down oil prices

Oil prices declined Mar. 6 on reports of economic problems in Russia and Europe and of possible renewed negotiations between Iran and the West.

“The market fell faster than [Russian President Vladimir] Putin's tears on renewed fears of an economic slowdown and a disorderly Greek default,” said analysts in the Houston office of Raymond James & Associates Inc. “Yesterday, the European Union's Statistics Office released economic data showing that Europe's economy continues to contract as gross domestic production declined 0.3% last quarter.” The front-month crude contract dropped 2% in the New York market.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil fell yesterday following the news that Iran is to reopen talks with the EU and members of [United Nations] security council. In addition, the financial market is concerned how private investors will respond to the Greek debt restructuring package, with a deadline for tomorrow night. Euro and major equity markets all suffered from sell-off yesterday.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The EU and US were waiting for the result of the Iranian elections, and we will have to see if a greater political cohesion in Iran can bring a higher chance of success for negotiations. Those do not have a great track record, but in the meantime it makes it much harder to expect a military strike while negotiations are ongoing. Military-wise, however, the US aircraft carrier USS Enterprise will leave over the weekend the US East Coast for the Persian Gulf. Given that the USS Vinson is currently in the Persian Gulf and the USS Lincoln in the Arabian Sea, we might have some people excited on Monday about the number of aircraft carriers around Iran theoretically rising to three. The reality, however, is much more likely to be that when the USS Enterprise arrives in the Arabian Sea, the USS Lincoln will be sailing home.”

Although crude prices were down, Zhang said, “Oil products held up slightly better, resulting in some improvement in product cracks but yet to provide material improvement over refining margins. Time spreads softened across the oil complex, amid poor refining margins in weak demand.”

Zhang said, “While the fall in oil prices was very much headline driven, we see considerable weakness in the physical oil market. Refining margins in both Europe and Asia have dropped significantly over the past 2 weeks, which should have removed all the incremental demand from simple refineries and have brought even some of the complex refineries into negative margin territory. As a result, time spread in Brent have weakened sharply during the last three sessions. Meanwhile, price differentials for physical crude cargoes of many differential major grades have fallen, with the exception of Forties and some of US grades. Forties crude appears to have been supported by arbitrage to Asia. With netback of Forties well below crude prices for many refineries, it is difficult to see how the price level will sustain, as soon as certain forms of panic buying is over.”

The oil market likely will “continue with its volatile correction phase probably for the rest of this week,” he said. “Technically, all major futures contracts look worse by the day. With the aforementioned weakness in the physical market, we can clearly see a sharp downward move coming fairly soon. That said, caution has to be taken with possible short-term rebound if the Greek debt restructuring deal goes through tomorrow and probably rather positive US nonfarm payroll data on Friday.”

US inventories

The Energy Information Administration said Mar. 7 commercial US crude inventories increased 800,000 bbl to 345.7 million bbl in the week ended Mar. 2, compared with Wall Street’s consensus for a 1.8 million bbl decline. Gasoline stocks decreased 400,000 bbl to 229.5 million bbl, short of an expected 1.6 million bbl drop. Finished gasoline decreased while blending components increased. Distillate fuel inventories dropped 1.9 million bbl to 139.5 million bbl, exceeding analysts’ anticipation of a 1.7 million bbl decline.

EIA reported imports of crude into the US were down 475,000 b/d to 8.7 million b/d last week. In the 4 weeks through Mar. 2, crude imports averaged 8.9 million b/d, up 766,000 b/d from the comparable period in 2011. Gasoline imports last week averaged 576,000 b/d while distillate fuel imports averaged 171,000 b/d.

Input of crude into US refineries dipped by 18,000 b/d to 14.6 million b/d last week with units operating at 83.9% of capacity. Gasoline production decreased to 8.6 million b/d and distillate fuel production declined to 4.2 million b/d.

Energy prices

The April contract for benchmark US light, sweet crudes traded at $104.51-107.34/bbl Mar. 6 before closing at $104.70/bbl, down $2.02 for the day on the New York Mercantile Exchange. The May contract dropped $1.97 to $105.21/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.02 to $104.70/bbl.

Heating oil for April delivery decreased 2.92¢ to $3.19/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 2.81¢ to $3.23/gal.

The April natural gas contract inched up 0.1¢ but closed essentially unchanged at a rounded $2.36/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 1.3¢ to $2.30/MMbtu.

In London, the April IPE contract for North Sea Brent lost $1.82 to $121.98/bbl. Gas oil for March fell $8.75 to $1,006/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 36¢ to $121.98/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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