MARKET WATCH: Politics, economic data lower crude prices

Crude prices retreated Apr. 23 on disappointing economic data out of China and Europe along with political events that triggered more uncertainty in the Euro-zone.

“Oil came under pressure again yesterday as the downbeat Euro-zone Purchasing Manager Index (PMI) data pointed to continuous economic contraction…and the equity markets were spooked by the French presidential election,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. President Nicolas Sarkozy lost the first round in France’s election to socialist candidate Francois Hollande (OGJ Online, Apr. 23, 2012).

Olivier Jakob at Petromatrix in Zug, Switzerland, reported, “The government in the Netherlands collapsed, and the two French presidential candidates will have to make some anti-European sound-bites over the next 2 weeks if they want to have a chance to be elected. The European stock markets were sharply lower, the euro-dollar [valuation] reversed most of the gains of [Apr. 20], and the Standard & Poor’s 500 Index could not regain the 50-day moving average.”

The broader markets pulled back with the S&P 500 trading down 0.8% as China's PMI remained at contraction levels, said analysts in the Houston office of Raymond James & Associates Inc.

“Investors continue to turn towards ‘safe haven’ bets as the 10-year US Treasury yields fell to 1.94%, while German 10-year bunds touched record lows of 1.56%,” Raymond James analysts reported. The Oil Service Index dipped 0.5% while the SIG Oil Exploration & Production Index remained relatively flat “despite a 4% rally in natural gas futures following a wintry storm hitting the East Coast,” they said.

Nevertheless, Zhang said, “Brent appeared to be saved by news of the North Sea production outage and alleged cyber-attacks on Iran’s oil ministry. Net for the day, Brent was only marginally lower” than its previous closing price.

Reformulated stock for oxygenate blending (RBOB) led the Apr. 23 market on news a cracker was brought down for repair at BP PLC’s 406,570-b/d Texas City, Tex., refinery following an Apr. 20 lightning strike.

Jakob said, “RBOB gasoline had a strong rebound after the correction of last week, but the rebound was much more in the crack than in the front time-spreads. The front backwardation moved relatively little compared with the move in the crack.”

Zhang said, “The unseasonable strength in middle-distillates persisted, which appeared to be driven by the European government replenishing the emergency reserves and large tenders from the Mediterranean and Africa.”

Supply and demand

Jakob noted,  “The US Highway Administration released the vehicles miles of travel (VMT) for February, and they were very strong, showing an increase of 1.8% vs. last year with the Northeast higher by 3.7% and the Midwest higher by 4.3%. The lack of winter is a part of the justification for the higher [mileage], but again it does not fit with the low implied gasoline [demand] reported for February unless there has indeed been a very strong improvement in the fuel efficiency of the US car fleet. For the first 2 months of the year the US VMT is higher by 1.7% compared with a year ago, and given that the implied gasoline demand reported by the Department of Energy for February was 3.61% lower than a year ago, the risk is to the see the monthly update released at the end of this month show an upward revision to the estimate of US gasoline demand (January was revised higher from minus 4.8% to minus 2.7%).”

Jakob said, “The refining margins in the Mediterranean have been increasing over the last 4 weeks but will now start to be at risk of rising differentials for Russian Urals. The Atlantic Basin sweet crude oil differentials remain under pressure even if a small fire over the weekend on the Buzzard field will likely result in another cargo of Forties crude being cancelled or pushed back.”

Meanwhile, the Carlyle Group is negotiating with Sunoco Inc. to form a joint venture that would transfer operation of Sunoco’s Philadelphia refinery to the privately held company. Jakob said, “The deadline for closure of the refinery has now been pushed back from July to August, which makes sense anyway given the current margins.”

If Carlyle takes over operations, it “will be looking at running the refinery on Bakken crude oil from North Dakota,” Jakob said. “The economics makes a lot of sense compared with importing West African crudes, and the refinery has already been running marginal amounts of Bakken crude. The rail, barge, and truck logistics seem complicated for now to bring Bakken crude to Philadelphia, but it does seem inevitable that the supply logistics will improve from Petroleum Administration for Defense District ( PADD ) 2 [covering the Midwest US] to PADD 1 [the East Coast] (a lot can be accomplished with unit trains) the same way that they have improved from PADD 2 to PADD 3 [the Gulf Coast] (even if not done overnight), and it reinforces our view that within 2 years the US will be importing close to no West African crude oil.”

Energy prices

The new front-month June contract for benchmark US sweet, light crudes dropped 77¢ to $103.11/bbl Apr. 23 on the New York Mercantile Exchange. The July contract declined 74¢ to $103.55/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 6¢ to $103.11/bbl.

Heating oil for May delivery inched up 0.22¢ but closed virtually unchanged at a rounded $3.14/gal on NYMEX. RBOB for the same month escalated by 4.46¢ to $3.19/gal.

The May natural gas contract jumped 8¢ to $2.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 6.9¢ to $1.92/MMbtu.

In London, the June IPE contract for North Sea Brent decreased 5¢ to $118.71/bbl. Gas oil for May fell $12.50 to $989.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 96¢ to $115.50/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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