MARKET WATCH: Escalating conflict in Gaza pushes up oil prices

Crude oil prices climbed Nov. 16 as conflict continued between Israel and Palestinian militants in the Gaza Strip while the price of natural gas jumped 8% to a 12-month high in the New York market on expectations of a colder winter despite a bearish inventory report earlier.

The Energy Information Administration reported the withdrawal of 18 bcf of natural gas from US underground storage last week. That reduced working gas in storage to 3.911 tcf. However, stocks are still 71 bcf higher than a year ago and 209 bcf above the 5-year average (OGJ Online, Nov. 15, 2012).

Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, “Crude oil continued Friday’s rally today due to improved risk appetite in equity markets, renewed tension between Israel and Gaza, as well as a weaker US dollar against the euro. Against this backdrop, the market seems to have been caught short.” Natural gas prices also were up in early trading in New York.

Israel escalated its bombing campaign over the weekend, targeting homes of activists in the Islamic militant Hamas group that launched rocket attacks on Israel. An airstrike killed a senior Hamas official Nov. 19.

Meanwhile, the latest Commodity Futures Trading Commission data “shows a market where speculative length in [West Texas Intermediate] has been declining steadily the past 4 weeks, said De Wet.

He said, “After an initial post-election jump, crude oil markets (especially WTI) have remained under pressure, with the obvious cause being concern over the impending fiscal cliff in the US, and the possible dire consequences for the economy and US crude oil demand. In addition, worries over the as-yet-unquantified deleterious effects of Hurricane Sandy on product and crude oil demand are also weighing on WTI. There could be little doubt that Sandy would have had a negative impact on demand, which should linger for a while to come.”

However, De Wet observed, “Short-term tension in the Middle East should keep bears at bay. Israel’s government said [Nov. 18] it is prepared to significantly widen the military operation against Gaza, and comments like these are likely to keep crude oil bulls in the driving seat for now. Although the eruption of hostilities between Israel and Gaza could stem the long liquidations we’ve seen these past weeks, we continue to find it difficult to see crude oil sustaining rallies in the current growth environment.”

European stock markets rallied before US markets opened Nov. 19 on “optimism that leaders in the US will reach a deal to avoid tax increases and government spending cuts set to take effect Jan. 1,” some financial analysts said. Additional strong corporate earnings reports also helped boost US equity markets.

The National Association of Realtors reported sales of existing homes increased 2.1% to a seasonally adjusted annual rate of 4.79 million in October, up from 4.69 million in September, which was revised lower. However, that’s still below the 5.5 million home sales that economists consider a healthy market.

Eagle Ford shale

In other news, analysts in the Houston office of Raymond James & Associates Inc. reported, “Eagle Ford continues to be one of the most prolific US plays. Putting the scale into context from a developmental perspective, industry sources suggest an estimated 10 million acres could hold 100,000 drilling locations. When assuming a pace of 2,500 wells drilled per year, this equates to 40 years of drilling inventory. We estimate that production growth out of the three primary shale plays (Eagle Ford, Permian, and Bakken) represents 100% of US total oil growth (net of significant Alaskan production declines) and 39% of US natural gas growth this year. When accounting for NGL growth, Eagle Ford liquids production is on the verge of exceeding 1 million b/d.”

With such robust production growth, midstream companies continue investing in much needed gathering and takeaway pipelines, processing of rich gas, NGL fractionation and storage units, and downstream distribution services. “Billions of dollars have been spent and will be allocated over several years as favorable hydrocarbon economics, production trends and reserve reports drive capital expenditures through the drill bit,” Raymond James analysts said. “Ultimately, Eagle Ford stands to be one of the best opportunities to move America closer toward energy independence, and its attractive geographic proximity to the heart of America's refinery and North American petrochemical industry doesn't hurt either.”

Energy prices

The December contract for benchmark US light, sweet crudes recovered $1.22 to $86.67/bbl Nov. 16 on the New York Mercantile Exchange. The January contract regained $1.05 to $86.92/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.22 to $86.67/bbl.

Heating oil for December delivery recovered 1.33¢ to $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month continued to rally, up 1.39¢ to $2.71/gal.

The December natural gas contract rebound by 8.7¢ to $3.79/MMbtu on NYMEX. But on the US spot market, gas at Henry Hub, La., dropped 12.7¢ to $3.50/MMbtu.

In London, the new front-month January IPE contract for North Sea Brent gained 94¢ to $108.95/bbl. Gas oil for December fell $10.50 to $920.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 19¢ to $107.04/bbl. The average price of OPEC’s basket so far this year increased to $109.77/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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