MARKET WATCH: Energy prices mixed in unfocused markets

North Sea Brent fell, West Texas Intermediate continued to increase, and natural gas slipped lower in mixed markets Aug. 17 as traders’ attention remained divided among “unprecedented” high US inventories, escalating Middle East tensions, and no progress in the Euro-zone financial crisis.

The stock market was down Aug. 20 after the German central bank said purchases of European bonds by the European Central Bank may pose substantial risks. A flurry of meetings among various top officials of some European governments is scheduled this week.

The price of Brent retreated Aug. 17 after climbing 28% over 59 days from a low of $91.33/bbl on June 18, said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “In reality little has changed in both the economic and geopolitical situations over this period,” they said. “We still have the ongoing threat of economic woes coming from the Euro-zone countries, although less vocal at this moment as European politicians take their traditional summer breaks, along with the geopolitical threats of the Middle East being unabated.”

Although commercial US petroleum inventories declined 3 successive weeks through Aug. 10, crude stocks remain high in the historical period of peak summer demand for gasoline. “This drop in crude inventories, led by [US Gulf Coast] declines is representative of high US refinery utilization, running at 92.6% for the first 2 weeks of August. The markets reacting to this inventory drop seemed not to recognize the 1.1 million bbl rise in Cushing, Okla., inventories, so maintaining record inventory highs for WTI’s settlement point. The Brent-WTI differential remains at more than $18/bbl,” KBC analysts reported.

President Barack Obama’s administration talks of a possible preelection release from the US Strategic Petroleum Reserve to drive down prices at the pump. But KBC analysts said such a move “is unwarranted and certainly too late in this year’s peak demand cycle to have any long-term impact on bringing down crude prices.” With the Organization of Petroleum Exporting Countries maintaining 31 million b/d of crude production and barring any major supply disruptions, “the world remains in ample supply,” they said.

Natural gas outlook

In Houston, analysts at Raymond James & Associates Inc. reported, “The US gas market this year has once again proven that the basic economic principle of price impacting demand still does work. Price competition between coal and natural gas for electric power generation (i.e., ‘switching’) has remained the key lynchpin in balancing the natural gas markets this year. With natural gas prices hitting decade-low levels earlier this year, the power markets responded by shutting down coal-fired generation and ramping up usage of gas-fired units.”

They said, “The key question for gas markets is ‘what gas price will be needed to keep the US gas supply-demand equation in balance?’ By our estimates, low gas prices allowed natural gas generation to pick up nearly 6 bcfd of incremental year-over-year demand at the expense of coal (through May). This has happened despite overall electric generation declining by 1.8%. Given the observed pricing sensitivity between coal and gas generation competition so far this year, we would expect natural gas prices will still need to remain range bound between $2.50 and $3.25/Mcf to balance the gas equation through November.”

Energy prices

The September contract for benchmark US light, sweet crudes increased 41¢ to $96.01/bbl Aug. 17 on the New York Mercantile Exchange. The October contract rose 43¢ to $96.32/bbl. On the US spot market, WTI at Cushing was up 41¢ to $96.01/bbl.

Heating oil for September delivery declined 3.03¢ to $3.09/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dropped 5.57¢ to $3.03/gal.

The September natural gas contract dipped 0.5¢ but closed essentially unchanged at a rounded $2.72/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 5.5¢, also closing at $2.72/MMbtu.

In London, the October IPE contract for North Sea Brent fell $1.56 to $113.71/bbl. Gas oil for September gained $2.50 to $979.75/tonne.

OPEC’s Vienna office was closed Aug. 20 with no update available on the average price for its basket of 12 benchmark crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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