MARKET WATCH: European economy brings down oil prices

Crude oil prices fell July 20 and continued tumbling in early trading July 23, along with the stock market, amid surging fears for Europe’s economy. Crude was down 1% in the New York market July 20, while natural gas rallied nearly 3% to a 6-month high on a bullish inventory report.

The euro dropped to a 2-year low against the US dollar on July 23, and yields for government bonds hit record bottoms as investors sought safer havens. Spain’s debt yield is at the highest level since formation of the Euro-zone, and economists fear more member-nations may seek handouts for their troubled economies. A Chinese central bank also indicated China’s economic growth may slow to 7.4%, down from 7.6% in the second quarter.

“Prior to those concerns, however, crude rallied over the past few weeks from more Iran-might-block-the-Strait-of-Hormuz fears,” said analysts in the Houston office of Raymond James & Associates Inc. “As US-led sanctions against the country further squeeze its economy, we see the odds of it making good on the threat to disrupt the oil markets as just-as-likely as a more peaceful resolution.”

Meanwhile, Iraq’s “ludicrously aggressive targets” for crude production growth will not flood international markets. Raymond James analysts said, “Being open to foreign investment is not a panacea. Although it is an important component—indeed, arguably a necessary one—to achieve substantial growth, it is by no means sufficient. A problematic (and, by some measures, worsening) security climate remains, with this weekend's pipeline attack near the Turkish border, which shut down roughly a quarter of the country's oil exports, a prime example. Moreover, stingy fiscal terms and an unresolved dispute with Kurdistan over oil licensing rights further reduce Baghdad's appeal for international operators.”

Still they said, “The progress that Iraq is making against the odds should not be ignored. The field redevelopment contracts signed in recent years are starting to yield incremental volumes, and in fact Iraq in 2012 is set to achieve its highest overall production run-rate since 1979. While Iraq's 2012 production increase of around 200,000 b/d pales in comparison [with] the US as a growth driver for global oil supply, it provides a useful reminder that the US is not the only reason why the oil market is at serious risk of oversupply heading into 2013. In fact, Iraq's production growth single-handedly covers 45% of the entire world's demand increase that we project for 2012, and 35% in 2013. Iraq is set to be one of the few major oil producers (within the Organization of Petroleum Exporting Countries or non-OPEC) with material production growth over the next 5-10 years.”

Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, reported, “Refinery margins in Europe and the US remain fairly high. The drop in crude oil prices should assist refinery margins even further. With seasonal gasoline demand set to rise in the next few weeks, demand for crude from refineries is likely to remain robust. For example, current refinery utilization rates in the US stand at 91.7%. The last time refinery utilization in the US was above 90% was in 2007. As a result, we expect Brent crude below the $100/bbl mark to be short-lived as refineries increase throughput on the back of higher margins. The demand for crude from refineries is reflected in our Brent crude oil forecast which we expect to average $100/bbl in the third quarter.”

However, with global growth slowing and the dollar strengthening, De West expects rallies towards $110/bbl to fade.

Energy prices

The August contract for benchmark US light, sweet crudes fell $1.22 to $91.44/bbl July 20 on the New York Mercantile Exchange. The September contract dropped $1.14 to $91.83/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., followed the front-month crude contract down $1.22 to $91.44/bbl.

Heating oil for August delivery declined 2.27¢ to $2.92/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, inched up 0.41¢ but closed essentially unchanged at a rounded $2.94/gal.

The August natural gas contract climbed 8.2¢ to $3.08/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 4.3¢ to $3.03¢/MMbtu.

In London, the September IPE contract for North Sea Brent lost 97¢ to $106.83/bbl. Gas oil for August fell $6.25 to $919.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes decreased 1¢ to $103.70/bbl. So far this year, the OPEC basket has averaged $110.64/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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