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MARKET WATCH: Cypriot crisis undercuts crude prices

Energy prices generally were down in mixed markets Mar. 21 with crude losing 0.6%. in New York while the United Nations’ International Monetary Fund, the European Central Bank, the European Union, and Russia “squabbled” over the possible economy bailout for Cyprus.

“Most investors stepped back from fundamentals yesterday and took profits after disappointing German manufacturing data added to the growing evidence that the Euro-zone debt crisis is ready to flare up again,” said analysts in the Houston office of Raymond James & Associates Inc. “Equities retreated a little further from last week's highs, with the Standard & Poor’s 500 Index slipping 0.8% during the trading session. The ominous macro environment weighed on commodities too.”

Analysts at Barclays Capital Commodities Research said, “Oil fundamentals have taken a back seat for now in determining momentum but continue to provide support by slowing the downward drift. In our view, prices are likely to gravitate back towards the magnetic $111/bbl mark once the current eclipse of macroeconomic headlines fades, with further oscillations possible in the short term within the $6/bbl radius off this center point, depending on the frequency and nature of macroeconomic headlines.”

A bearish inventory report also pushed the front-month natural gas down 0.6% in the New York market. The SIG Oil Exploration & Production Index declined 1.2% and the Oil Service Index retreated 0.7%. Crude and gas futures prices were up in early trading Mar. 22, however.

Earlier this week, Cyprus rejected EU’s bailout proposal that required the island state’s government to levy a 10% tax on savings accounts in Cypriot banks. The country then requested financial assistance from Russia, which some see as a potential threat to EU unity if member countries begin seeking—and possibly obtaining—financial help from non-member nations.

The Associated Press reported many Russians have business interests and hefty bank deposits in Cyprus, and Russia could afford to extend and reduce rates on its 2011 loan of €2.5 billion to Cyprus. However, negotiations with Russia appeared Mar. 22 to be stalled.

Meanwhile, the ECB is providing support to shore up Cypriot banks. Those banks have remained closed this week to avoid runs by depositors—what Raymond James analysts called “a stick-your-fingers-in-your-ears-and-scream-nah-nah-nah solution in lieu of a much needed bailout that is not looking likely.”

Jodie Gunzberg, head of commodity indices at S&P Dow Jones Indices LLC, said, “The crisis in Cyprus is only golden for gold,” which has become a safe haven for investors in the current crisis. But “the typically economically sensitive energy sector is falling” due the crisis, which also “may be disrupting the Euro-zone’s recovery and negatively impacting” the industrial metals market.

US inventories

The Energy Information Administration reported the withdrawal of 62 bcf of natural gas from US underground storage in the week ended Mar. 15, below the Wall Street consensus for a 71 bcf pull. That left 1.876 tcf of working gas in storage, down 502 bcf from the comparable period a year ago but 162 bcf above the 5-year average (OGJ Online, Mar. 21, 2013).

Raymond James analysts reported front-month gas futures immediately traded down following the EIA report. “Excluding weather-related demand, there was 1.5 bcfd more natural gas added to storage than this time last year, and we have averaged 400 MMcfd looser over the past 4 weeks. All in, we are on track to exit withdrawal season with 1.8 tcf in storage, a substantial improvement vs. our initial 2.1 tcf estimate.”

However, they said, “This is likely already baked into gas prices, given the recent run. The ‘weather intensity’ factor has been clearly demonstrated in the gas markets, and as we slip into the seasonally weaker shoulder season, we would expect some pressure to come off the gas market until we enter the summer cooling season, potentially resulting in a pullback in natural gas prices. Either way, the market dynamics have changed to a less bearish outlook, and depending upon summer weather, we would expect natural gas prices to hold in the $3.50-4/Mcf range over the next few months, with gas-to-coal switching likely maintaining a near-term ceiling on gas prices.”

Energy prices

The new front-month May contract for benchmark US light, sweet crudes fell $1.05 to $92.45/bbl Mar. 21 on the New York Mercantile Exchange. The June contract lost $1 to $92.77/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., declined 51¢ to match the new front-month futures closing price of $92.45/bbl.

Heating oil for April delivery gained 0.42¢ to $2.90/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 4.57¢ to $3.07/gal.

The April natural gas contract was down 2.5¢ to $3.94/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., rose 3.1¢ to $4.01/MMbtu.

In London, the May IPE contract for North Sea Brent dropped $1.25 to $107.47/bbl. Gas oil for April retreated 50¢ to $898.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 16¢ to $105.69/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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