MARKET WATCH: Energy prices mixed in worried markets

Energy markets were mixed Jan. 31 with front-month crude dipping 0.5% from a 4-month high in the previous session while natural gas closed essentially flat in the New York futures market. Fears about the stalled economy also weighed on the equity market with the SIG Oil Exploration & Production Index down 0.3% and the Oil Service Index up 0.7%.

In Houston, analysts at Raymond James & Associates Inc. said, “Front-month gas prices were trading down 7¢ to $3.26/Mcf” immediately following the Energy Information Administration’s weekly report that showed a lower-than-expected withdrawal of 194 bcf of natural gas from US underground storage in the week ended Jan. 25, less than the Wall Street consensus of a 204 bcf decrease. That left 2.8 tcf of working gas in storage, 202 bcf less than in the comparable period in 2012 but 304 bcf above the 5-year average (OGJ Online, Jan. 30, 2013). “We are on pace for another year with a large balance in storage inventory; subsequently, the gas market has weakened realizing that prices need to stay low enough to incentivize demand,” Raymond James analysts said.

EIA also reported gas production in the US Lower 48 increased 400 MMcfd in November to a record high of 73.88 bcfd, up 1.4 bcfd from a year ago. “While offshore volumes continued to rebound and a pair of gas plants in Wyoming brought production back up to more normalized levels, the primary growth driver remains the Marcellus,” said Raymond James analysts. They noted, “Louisiana volumes continue to slide and are down 600 MMcfd from their June peak, though the survey noted some operator shutins during the month. Looking ahead, we continue to forecast supply growth of 1.3 bcfd in 2013, followed by 600 MMcfd of growth in 2014.”

Oil price outlook

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said his office forecasts a quarterly average price of $109/bbl for Brent crude “premised on continued supply growth (largely non-OPEC) and persistently anemic demand.” However, he noted “non-negligible upside risks to this forecast,” including a stronger-than-anticipated improvement in China’s energy demand.

“While the recent pick-up in Chinese crude oil imports appears promising,” Ground said, “we still feel that China’s economy is at best stabilizing with limited potential for strong growth—at least not to the extent that we’ve seen in past recoveries. In addition, with the US and Euro-zone still struggling, Chinese exports should remain relatively lackluster, further compressing the potential for significant upside in economic activity.”

He said, “Another more significant upside risk to our crude oil forecast is the bubbling up of Middle East and North Africa (MENA) tensions. Violent protests in Egypt, terrorist attacks in Algeria, and uprisings in [The Republic of] Mali [on Algeria’s southern border] have all raised the geopolitical risk premium embedded in oil prices. Algeria produces around 1.2 million b/d, and neighboring Libya (Western governments have warned their citizens of ‘imminent threats’ in that country) at last count was producing 1.5 million b/d. Egypt’s oil production is only around 700,000 b/d, although the Suez Canal and the Suez-Mediterranean pipeline are significant choke points in the global oil supply chain. It is worth noting that Algeria, Libya, and Egypt’s production is more than Saudi Arabia’s spare capacity. Mali does not itself produce any oil, but conflict here could easily raise tensions throughout the region.”

Ground said, “Aside from North Africa, we have recently seen attention drawn to the Middle East again after Israel's military strikes in Syria. Civil strife rages on in Syria, with the potential for an escalation and spill-over ever present. We also have another round of negotiations concerning Iran’s nuclear enrichment program coming up, which could again see Iranian sabre rattling (closing the Straits of Hormuz).”

These geopolitical risks raise the probability of prices overshooting Standard Bank’s forecast.

In other news, rescuers in Mexico City continued to search for survivors of a basement explosion Jan. 31 in the administration building of Petroleos Mexicanos (Pemex). Officials reported 32 people were killed and 121 injured. The cause of the blast is not yet known.

The US Department of Labor reported a jump in new jobs in the last 2 months of 2012, revising upward earlier tallies for November and December. However, the unemployment rate increased to 7.9% in January from 7.8% previously.

Energy prices

The March contract for benchmark US light, sweet crudes dropped 45¢ to $97.49/bbl Jan. 31 on the New York Mercantile Exchange. The April contract lost 42¢ to $97.96/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was down 45¢ to $97.49/bbl in step with the front-month futures contract.

Heating oil for February delivery continued to rise, up 1.25¢ to $3.13/bbl on NYMEX. Reformulated stock for oxygenate blending for the same month, however, declined 1.29¢ to $3.03/gal.

The March natural gas contract inched up 0.4¢but closed essentially unchanged at a rounded $3.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 9.6¢ to $3.33/MMbtu.

In London, the March IPE contract for North Sea Brent gained 65¢ to $115.55/bbl. Gas oil for February increased $2.25 to $993/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 87¢ to $112.30/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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