MARKET WATCH: Oil prices climb, but joy over new budget appears to wane

Oil prices climbed Jan. 2 in the general euphoria after the House of Representatives finally passed a fiscal budget, but prices dipped in early trading Jan. 3 as budget worries were replaced by concerns over the debt ceiling still in place.

The front-month contract for benchmark US crude rose 1.4% Jan. 2 in the New York market, bolstering rallies of 2.6% for the Oil Service Index and 1.6% for the SIG Oil Exploration & Production Index, said analysts in the Houston office of Raymond James & Associates Inc. However, natural gas prices continued falling.

North Sea Brent crude “rallied strongly on the back of higher equity markets,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group.

The PIRA Energy Group in New York said oil market fundamentals are weakening even as the global economic backdrop seemed to improve. “The 2013 oil market is in general not bullish,” PIRA analysts reported. They expect the Organization of Petroleum Exporting Countries to reduce production to balance markets as non-OPEC supply outpaces demand in 2013.

“North American production is growing swiftly, which will negatively affect Atlantic Basin supply-demand balances, especially during refinery maintenance [in the first half of this year]. US imports of light-sweet and medium-sweet crudes will continue declining rapidly. The West Texas Intermediate-Brent spread will narrow sharply into mid-2013,” they predicted.

They expect heavy crude price differentials to remain firm for Latin American grades of crude this year. “Global coking capacity will increase faster than heavy crude production, keeping vacuum residual balances tight and fuel oil cracks relatively strong,” PIRA analysts said. “Coking refinery margins will only be at a narrow premium to cracking margins, and some coking capacity will not be fully utilized.”

PIRA reported, “Canadian oil pipeline infrastructure is becoming woefully inadequate relative to the current and growing level of anticipated future production. Expanded pipeline capacity to both the US and the West Coast has been slowed by political opposition, placing in jeopardy new production from the oil sands. However, the growing attention to rail alternatives reflects the powerful economic incentives to find a way to move this crude to higher value markets.”

Despite a high level of US refinery downtime in the fourth quarter, PIRA analysts said, “Planned downtime during the first half of 2012 is anticipated to be well above average. Given the difficulties of bringing units back into service and the potential for unplanned outages, it is likely that actual downtime will be even higher.”

Meanwhile, tanker markets ended 2012 on a positive note, with spot rates in most trades safely above cash operating costs. The analysts said, “Clean tanker rates, especially for the larger product groups, have been especially firm, hitting multiyear highs on strong naphtha demand from Asia. While excess capacity remains a problem, fleet growth slowed significantly in 2012 due to rationalization measures, including a slowdown in tanker orders and early scrapping of surplus tonnage.”

Analysts at PIRA reported, “US ethanol prices tumbled in December, primarily due to plunging corn costs. Demand was weak with ethanol selling at a premium to gasoline components in many parts of the country mid-month, causing the penetration of ethanol-blended gasoline to drop to the lowest level since January. Production rebound from summer lows, and inventories built to a 26-week high during the week ending Dec. 14.”

Energy prices

The February contract for benchmark US sweet, light crudes climbed $1.30 to $93.12/bbl Jan. 2 on the New York Mercantile Exchange. The March contract rose $1.28 to $93.55/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.30 to $93.12/bbl.

The new front-month heating oil contract for February delivery increased 1.45¢ to $3.05/gal on NYMEX. Reformulated stock for oxygenate blending for the same month gained 3.34¢ to $2.80/gal.

The February natural gas contract dropped 11.8¢ to $3.23/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 13¢ to $3.27/MMbtu.

In London, the February IPE contract for North Sea Brent advanced $1.36 to $112.47/bbl. Gas oil for January jumped $15.50 to $942.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated by $1.17 to $108.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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