MARKET WATCH: Oil prices rebound with offshore evacuations

As offshore operators evacuated platforms and rigs in the Gulf of Mexico ahead of Tropical Storm Debby, oil prices registered moderate gains June 22 ending 2 days of sharp losses.

The US Department of the Interior’s Bureau of Safety and Environmental Enforcement reported 61 of the 596 manned platforms and 13 of the 70 rigs in the gulf were evacuated by midday June 24. Government officials also reported 22.7% of gulf oil production and 22.9% of natural gas output were shut in.

Nevertheless, energy and stock prices were down again in a market shift to low-risk investments June 25 after Spain asked for outside aid for its troubled banks. Crude lost more than $1/bbl in early trading, “continuing a slump that has brought the price down from $110/bbl in late February,” the Associated Press reported. Germany's Finance Minister Wolfgang Schaeuble meanwhile rejected President Barack Obama's call for Europe to accelerated solution of its debt crisis, saying, “Mr. Obama should first of all take care of reducing the American deficit, which is higher than in the Euro-zone.”

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “While the previous week’s moves showed a market slightly less inclined to be short although definitely not confident enough to be long, this past week we saw a growing conviction against being long. Demand concerns over the apparent weakening of the US and Chinese economies seem to be gaining the upper hand.”

China demand, Saudi supply

Commodity research analysts in the investment banking division of Barclays Bank PLC reported, “Among all the data releases that we cover, there are two numbers that stand out. First, Chinese oil demand growth thus far in the second quarter has averaged just 0.7%, the slowest growth since the first quarter of 2009. Second, by some estimates, the Organization of Petroleum Exporting Countries’ production has remained above 31 million b/d for 7 straight months, for only the second time since the 12 months starting from October 2007.” Saudi Arabian oil production “has stayed above 9.5 million b/d and close to 10 million b/d for 12 straight months for the first time ever,” they noted.

“That swing in balances is at the heart of what remains an extremely negative market sentiment,” Barclays analysts said. “While prices have already made a substantial downwards move, the outlook held by the bulk of the market has, if anything, worsened during the period that prices have been falling.”

They said, “Increasingly, Chinese demand has been a central sentiment-setter in the oil market, as the epicenter of growth has moved away from the US to the East. Likewise, Saudi Arabian output has always mattered more than the output of other producers, particularly because it is policy-determined and is a reflection of the outlook of the key player within OPEC.”

However, while Saudi production remains high, they said, “It has not increased much over the past 10 months. In fact, some third-party estimates of Saudi output have already detected a turning point to below 10 million b/d. That, to us, does not indicate that Saudi Arabia is continuing to place more crude into the market; in fact, it is quite the reverse. Moreover, while Saudi Arabia seems to have taken a dovish stance at the latest meeting by aiming for a soft landing of prices at about $100/bbl, it is likely that the pace of the latest free fall in prices might have stirred just an element of nervousness even in the kingdom, particularly when its own perception of its revenue needs has moved higher.”

They said, “It has really been the freezing of purchases due to the macroeconomic uncertainty that has created the prompt surplus, and it is demand that has to return to stem the free fall of prices. While the fall in prices below $90/bbl did entice some strong buying, it remains too early to judge whether the buying was merely to take advantage of some very attractive prices for long-term hedging or whether sentiment and, in turn, demand has actually started to turn.”

Reduced drilling expected

In mid-April analysts in the Houston office of Raymond James & Associates Inc. lowered their 2013 US rig count forecast to a 3% average annual decline, amounting to a 10% drop from the start to the end of this year. After again reducing their oil price outlook last week, they now expect average annual US onshore rig growth of only 4% in 2012 and a 13% decline in 2013.

“In fact, we think the looming oil supply problem potentially could be so severe that West Texas Intermediate prices must fall far enough to drive the total US onshore rig count down roughly 25% from now until the end of 2013,” they reported. “Keep in mind that consensus expectations for 2013 still assume increasing drilling activity year-over-year. To put this into perspective, last week the total rig count reached 1,966 rigs, and we anticipate by the end of 2013 there will be roughly 1,470 active rigs.”

Energy prices

The August contract for benchmark US light, sweet crudes traded at $77.56-80.37/bbl June 22 on the New York Mercantile Exchange before closing at $79.76/bbl, up $1.56 for the day. The September contract regained $1.58 to $80.14/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.56 to $79.76/bbl.

Heating oil for July delivery inched up 0.84¢ to $2.53/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 1.98¢ to $2.57/gal.

The July natural gas contract continued its rise, up 4.3¢ to $2.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., recouped 2.5¢ to $2.54/MMbtu.

In London, the August IPE contract for North Sea Brent was up $1.75 to $90.98/bbl. However, gas oil for July dropped $10 to $812/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost 74¢ to $88.74/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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