MARKET WATCH: North Sea Brent climbed to 3-month highs last week

The front-month contract for North Sea Brent crude ended January at a 3-month high of $115.55/bbl and climbed to $116.76/bbl Feb. 1, largely on hopes of a global economic recovery. Oil commodities generally ended the week with higher prices.

In the New York futures market, benchmark US crude gained 2% for the week on optimistic economic data and ongoing geopolitical tensions in the Middle East, “making this the longest run of weekly gains in more than 8 years,” said analysts in the Houston office of Raymond James & Associates Inc. Natural gas started the week strong but closed down 4% on a low storage withdrawal and US gas production still at record levels in November.

“Last week saw another strong performance by stocks too, with the new year rally extended to 5 consecutive positive weeks,” Raymond James analysts reported. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index “are now within spitting distance of their all-time highs,” they said.

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “Coupled with growing optimism over the US and Chinese economies, geopolitical tensions have further whetted investors’ appetite for crude oil. This has helped West Texas Intermediate shrug off Seaway Pipeline off-take concerns and kept net speculative length, according to the latest Commodity Futures Trading Commission data, on its upward trajectory—a hefty 23.6 million bbl were added for the week ended Jan. 29, the strongest increase since August of last year. The market remains confident, adding 12.97 million bbl to speculative longs, and resuming its liquidation of shorts—10.7 million bbl unwound.”

Analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, reported, “Euro-zone economic sentiment improved more than expected across all sectors in January, with signs showing that the region’s economy could have bottomed in the fourth quarter of 2012.” In the US, Congress agreed to extend the US debt ceiling to May 18, and Federal Reserve System officials continued their $85 billion monthly bond-buying plan in a continuous effort to stimulate the economy. Geopolitical risks in the Middle East with tensions building after Israel’s mid-week air strike on Syria also supported oil prices, KBC analysts said.

“The recent bubbling up of Middle East and North Africa tensions…does pose significant upside risk,” Ground acknowledged. “Nevertheless, given last week’s intensity of these tensions, we feel that the balance of risks now lie to an easing, which could see oil prices lose ground—something we’ve already witnessed this morning.”

Meanwhile, Raymond James analysts said, “While US inland refining margins remain in the stratosphere, the same cannot be said of European or Asian margins, and the US East Coast is a rough place as well. Meanwhile, petroleum demand is steadily shrinking across the industrialized world; we project that 2013 will be at the lowest level since the late 1990s. In this context, major multinational oil and gas companies are actively reducing their refining exposure, with an aggregate capacity cut of approximately 30% since 2010.”

Marathon Oil Corp., ConocoPhillips, and Murphy Oil Corp. “went all the way and implemented full-scale downstream spinoffs, while Hess [Corp.] is on the cusp of shutting down its only remaining refinery,” Raymond James reported. “The rest have been following more of a ‘below the radar’ strategy—gradual cuts in refining capacity via asset sales or more creative solutions. While we expect the remaining integrated companies to stay…integrated, the trend towards even more upstream-centric business models should continue. This carries benefits from the standpoint of multiple expansions, but it also weakens the natural hedge inherent in having downstream leverage.”

KBC analysts said, “Oil consumption in Organization for Economic Cooperation and Development countries has peaked, and further decline is expected due to a range of factors, including ageing and declining populations, growing concerns about security of supply, heightened environmental efforts, and as the economies of these countries continue to shift structurally to less energy-intensive sectors. However, demand growth in non-OECD countries, boosted by rising incomes and population growth, will more than offset the decline in OECD countries. Overall, global oil demand is projected to post an average annual growth of 1.06% [in] between 2013-22, moderating from 1.23% over 2003-12.”

Energy prices

The March and April contracts for benchmark US light, sweet crudes regained 28¢ each to $97.77/bbl and $98.24/bbl, respectively, Feb. 1 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was up 28¢ to match the closing price of the front-month futures contract.

The new front-month heating oil contract for March delivery increased 4.19¢ to $3.16/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced 2.19¢ to $3.05/gal.

The March natural gas contract dropped 3.8¢ to $3.30 MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.9¢ to $3.34/MMbtu.

In London, the March IPE contract for North Sea Brent continued climbing, up $1.21 to $116.76/bbl. Gas oil for February escalated $12.75 to $1,005.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 32¢ to $112.62/bbl. So far this year, OPEC’s basket price has averaged $109.45/bbl, compared with an average $109.43/bbl for all of 2012.

Contact Sam Fletcher at samf@ogjonline.com.

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