Energy prices rebounded June 14 in the New York market as traders ignored negative economic indicators, with the front-month natural gas contract escalating a whopping 14% on a bullish storage report.
The benchmark crude contract rose 1.6% in New York, but the price of North Sea Brent continued to slip lower in the London market.
In the US, unemployment benefits applications increased, creation of new jobs decreased, and consumer prices registered the biggest monthly decline since December 2008, signifying decreased demand for products (OGJ Online, June 14, 2012). The Federal Reserve reported June 15 US factory output dropped 0.4% in May, down from a 0.7% increase in April as auto manufacturers reduced production for the first time in 6 months.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said “West Texas Intermediate continued to outperform Brent and oil products in general as the market is optimistic that the oil glut at Cushing, Okla., is to be drawn down following the Seaway Pipeline reversal. Meanwhile, oil products are holding their counterseasonal strength as global oil product stocks are at the lower end of their historical range. Although US refineries have gradually increased run rates in the past few weeks, refinery throughput in Europe and Asia has so far failed to boost product stocks.”
Yesterday’s rally in both oil prices and the equity market was based on expectations “that global central banks stand ready to provide a flood of liquidity if the election result [June 17 in Greece] spurs a financial panic,” said analysts in the Houston office of Raymond James & Associates Inc. “The market's gyrations this week have paralleled rumors about the Greek election and what its aftermath might bring.”
Zhang said, “Suffering from a $20/bbl drop and the ongoing Euro-zone debt crisis, the oil market has so far found it difficult to sustain any proper rallies. Risk-taking is hindered by significant event risks in the next few days. On the balance of risks, we do see more upside than downside risks in the oil price.”
The Energy Information Administration reported the injection of 67 bcf of natural gas into US underground storage in the week ended June 8. That was below Wall Street’s input consensus of 75 bcf. Working gas in storage now stands at 2.944 tcf, up 708 bcf from the comparable period a year ago and 666 bcf above the 5-year average (OGJ Online, June 14, 2012).
OPEC stands pat
As was generally expected, ministers of the Organization of Petroleum Exporting Countries meeting in Vienna voted to maintain their total production ceiling of 30 million b/d while pledging to “swiftly respond” to any threat to market stability (OGJ Online, June 14, 2012).
They reiterated the increase in price volatility is the result of geopolitical tension and speculation in commodities markets rather than fundamentals of supply and demand. They cited international concern over Euro-Zone sovereign debts and the consequent weakening economic outlook that has reduced demand for oil.
“Saudi Arabia cannot at the same time commit to a supply-cut to please OPEC and commit to replace Iranian barrels to please the G20 [group of 20 finance ministers and central bank governors from the biggest economies],” said Olivier Jakob at Petromatrix in Zug, Switzerland. King Abdullah bin Abdul-Aziz Al Saud of Saudi Arabia is to attend the G20 meeting June 18-19 in Mexico.
“The world crude oil price is currently made in the US. This is a very significant change from the past few years and a trend that will continue for the next 2 years,” Jakob said. “It is not the Chinese demand pull on oil that is driving the dynamics of crude oil flows but the US supply push. For the last 2 years, the US was lacking the transport infrastructure to move the new supplies out of the Midwest, but this is changing thanks to additional pipelines both fixed and on wheels (unit trains).”
He said, “The problem with the US supply push is that OPEC is ill-equipped to deal with it. Saudi Arabia is the global swing supplier but with no light, sweet crude capacity. Hence when a country like Libya is losing its export due to war, there is little that Saudi Arabia can do about it, and when a country like the US is diverting light, sweet crude imports due to increased domestic production, Saudi Arabia also cannot do very much about it. The demand currently is for replacement of Iranian barrels, for refinery production of bottom-ends (Japanese fuel demand), and not for refinery production of the top-end or for replacement of Nigerian barrels. The marginal demand is not for light, sweet crude oil; hence we continue to believe that it will be harder in the second half for Brent to resist the US supply push and therefore that the time-structure of Brent can return to visible pressure.”
Increased export of US petroleum products is reducing European imports of crude. As a result, Jakob said, “The differentials for light, sweet crude oil in the Mediterranean are getting crushed.” Although the price of Brent crude has until now been buoyed by increased exports to South Korea, he said, “The economics are starting to change. The differentials for Mediterranean grades have fallen so much that they will be increasingly competitive in Asia when compared with the artificial European-South Korea economics. If South Korean refiners get a 3% discount when buying Forties crude, Saharan Blend has now moved to a 3% discount to Forties. July Brent expired yesterday, losing most of its backwardation, and Brent August-September was trading flat.”
As more crude flows from Cushing to the Gulf Coast, he said, “The US will be lowering its requirement of West African barrels in the second half of the year; those barrels will have to go somewhere, and as a result the Brent-WTI [spread] is narrowing as Brent needs to narrow its premium to Dubai to push east the barrels that the US is forcing to be diverted to Europe.”
The July contract for benchmark US light, sweet crudes regained $1.29 to $83.91/bbl June 14 on the New York Mercantile Exchange. The August contract rebound $1.30 to $84.22/bbl. On the US spot market, WTI at Cushing was up $1.29 to $83.91/bbl.
Heating oil for July delivery increased 1.69¢ to $2.63/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced 2.1¢ to $2.68/gal.
The July natural gas contract jumped 31¢ to $2.50/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dipped 0.1¢ to $2.19/MMbtu.
In London, the July IPE contract for North Sea Brent lost 10¢ to $97.03/bbl. Gas oil for July dropped $2.75 to $844.75/tonne.
The average price for OPEC’s basket of 12 benchmark crudes was down 34¢ to $95.22/bbl.
Contact Sam Fletcher at email@example.com.