MARKET WATCH: Crude prices fall in ‘worst day of the year’

Oil prices fell Feb. 4 with the front-month crude contract dropping 1.6% in the New York futures market after rising 10% since early December. It was the “worst day of the year” for that market, said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

The fall came after Iran agreed to resume negotiations with the US and other countries on its nuclear program, instantly easing the geopolitical tension premium in crude prices, some analysts said. Iran hasn’t met US, UK, China, France, Russia, and Germany representatives on this issue since June. Western leaders and analysts suppose world trade sanctions against Iran are forcing the country’s leaders back to the conference table. An oil embargo has stopped about half of Iran’s crude exports, and its currency recently fell to a record low against the US dollar.

“It appeared as if the US would take a more conciliatory tone in the upcoming negotiations with Iran,” Ground said. “This morning, it is largely dollar movements that are driving the [oil market], with a weaker dollar providing some lift.”

The decline in oil prices also was assisted “by the weaker-than-expected 1.8% month-to-month growth in US factory orders during December (consensus: 2.3%,) together with the downward revision (minus 0.3% month-to-month) of the November number,” he said. “Besides these proximate causes for the downward pressure, given the heady start to the year we do feel that some correction to oil prices is warranted given global market fundamentals and continue to believe that prices will move lower as we move further into the quarter.”

In Houston, analysts with Raymond James & Associates Inc. said, “Broader markets exhibited some acrophobia for the first time this year as troubles in the Euro-zone prompted a (rational) fear of heights. With stocks sitting at 5-year highs, investors seized the opportunity to take profits from the recent market rally, sending the Standard & Poor’s 500 Index down 1.2%, its biggest fall year-to-date.” Corporate energy stocks followed the broader market with the Oil Service Index down 1% and the SIG Oil Exploration & Production Index declining 1.5%.

However, analysts with the PIRA Energy Group in New York said bullish factors will push oil prices higher as continued low US refinery runs support product stock draws and crude stock builds. “Total US commercial stocks built the week ending Jan. 25, as a crude stock increase more than offset a product inventory decline. The year-on-year stock excess narrowed as last year saw a larger overall inventory increase in this week,” they said. “For the week ending Jan. 26, Japanese crude runs declined and crude stocks were modestly higher. Gasoline and gas oil demands were stronger and allowed for minor stocks draws in both products. Kerosene demand eased, with the stock draw rate continuing to run at recent levels.”

They noted the propane inventory report for the week ended Jan. 25 “showed the highest draw for the US heating season to date and was more than double the decline that was recorded for the reference period last year. Frigid weather boosted overall demand to well above 2012’s level. While stocks have drawn over the last 4 weeks, inventory is comparatively high for this time of the year. Propane has been the more economic US petrochemical feedstock for most of January. It is also an economic alternative to naphtha in Europe.”

In other news, LNG Canada, a joint venture comprised of Shell Canada Ltd., Korea Gas Corp., Mitsubishi Corp., and PetroChina Co. Ltd., received approval from Canada's National Energy Board to export LNG from British Columbia. “This becomes just the second major LNG export project to receive approval in Canada, after the Kitimat consortium of Chevron Corp. and Apache Corp.,” said Raymond James analysts. “The only fully permitted US project is Cheniere Energy's Sabine Pass project in Louisiana. LNG Canada plans to export up to 3.2 bcfd to Asia, with tentative plans calling for a final investment decision by mid-decade and startup around 2020. In addition to the three permitted projects, there are more than two dozen other projects at some stage of development in the US and Canada, totaling over 35 bcfd, though we anticipate that only a small fraction of those will ever get built—a function of permitting hurdles as well as financing constraints.”

Energy prices

The March contract for benchmark US sweet, light crudes fell $1.60 to $96.17/bbl Feb. 4 on the New York Mercantile Exchange. The April contract dropped $1.58 to $96.66/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.60 to match the front-month futures closing of $96.17/bbl.

Heating oil for March delivery slipped 0.66¢ to $3.15/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 4.21¢ to $3.01/gal.

The March natural gas contract increased 1.4¢ to $3.32/bbl on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5.3¢ to $3.29/MMbtu.

In London, the March IPE contract for North Sea Brent declined $1.16 to $115.60/bbl. Gas oil for February retreated $1.75 to $1,004/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes, however, gained 37¢ to $112.99/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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