Crude rises in optimistic market

The front-month crude contract for North Sea Brent climbed through most of August from $104.92/bbl July 31 to as high as $116.90/bbl Aug. 16, hovering around $114/bbl through Aug. 24 as market optimism for solution of the Euro-zone financial crisis and increased demand “prevailed over hard facts and past experience,” said analysts at the Centre for Global Energy Studies, London.

“Oil futures moved upward on continued concerns over an anticipated short-term supply disruption due to maintenance in the North Sea and on increased hope that Euro-zone leaders will make progress on resolving the region’s debt crisis,” CGES analysts reported. Prices also were buoyed as the Standard & Poor’s 500 Index escalated to its highest level in 4 years, the euro strengthened to $1.25, and the US Federal Reserve and China’s Central Bank seemed ready to stimulate the economy.

“Oil supply, especially in Europe, has been tightening during the past couple of months,” CGES acknowledged. “But the global demand environment for crude oil is extremely poor for this year and in 2013 and is insufficient to support the price increase for much longer.” Front-month Brent retreated to $13.59/bbl at close of trading Aug. 24 as doubts resurfaced regarding the strength of the United States’ economic recovery and Greece’s ability to overhaul its economy.

Rumors Germany might ease time restrictions for Greece's bailout requirements if the main targets of the austerity program were met encouraged investors to take on riskier assets, initially sending oil prices higher in the week ended Aug. 24. Reports the European Central Bank intended to cap bond yields of peripheral Euro-zone nations to prevent contagion of core economies also boosted market confidence.

“However, looking past these expectations, the macroeconomic data are not encouraging,” CGES analysts said. “Germany's private sector continues to shrink, and surveys suggested the Euro-zone is heading for a double-dip recession, while at the same time it is vulnerable to an oil shock as crude prices denominated in euros surged above their 2008 levels.” The willpower to save the euro exists, “but converting good intentions into actionable decisions is a shaky procedure that could be overturned quickly by the course of events,” they cautioned.

The Euro-zone debt crisis is undermining global economic recovery. Japan’s trade deficit widened in July as its exports to the European Union fell 25% from a year ago. China's manufacturing hit a 9-month low in August. “Things in the US are not looking bright either, as economic activity has slumped sharply from earlier this year, and possible contagion from the European debt crisis, together with the risk of a hard landing for China's economy, have added greater uncertainty to US economic prospects,” CGES officials said.

“Regional, short-term factors such as the impending maintenance in the North Sea and the shortage of middle distillate fuel in Europe can explain some of the rise in Brent prices,” they said, “while a big dose of nervousness is still provided by Iran, as Ayatollah [Sayyed Ali] Khamenei's latest saber-rattling statements about Israel demonstrated. Consequently, for now prices are expected to remain range-bound, unless Middle East tensions lessen dramatically or the Euro-zone debt crisis escalates once more.”

Distillates decline

Distillate inventories in the EU have been squeezed most of this year by low refinery runs and reduced capacity as European refineries were forced to shut down. Diesel stocks are particularly low as a result of reduced imports from the US, which is sending more diesel to Latin America, and from Asia where refinery closures have reduced long-haul exports from South Korea and India. CGES analysts said, “Growing volumes of diesel are likely to be heading to India following recent power outages, with diesel generators being the preferred backup when the power network is overwhelmed. Diesel exports from Russia are expected to increase in the coming weeks now that punitive export levies have been lifted, which should alleviate some of the tightness.”

They noted Chinese crude imports fell to 5.11 million b/d in July, “seemingly bringing to a close the stock building that was widely perceived to be behind high imports in the first half of 2012.” They said, “This may simply reflect temporary difficulties in shipping Iranian oil in the face of the EU ban on tanker insurance, but July also saw China’s exports grow by just 1% year-on-year, which together with falls in manufacturing activity is sparking fears that the Chinese economy is heading for a hard landing.”

(Online Aug. 27, 2012; author's e-mail: samf@ogjonline.com)

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