MARKET WATCH: Cyprus bailout agreement pressures oil prices

Oil and natural gas prices continued climbing Mar. 15, but oil was under pressure from a strong dollar in early trading Mar. 18 after the government of Cyprus agreed over the weekend to seize 10% of residents’ bank accounts as part of a $20.4 billion bailout. This inflamed fear over the sovereign debt crisis in the Euro-zone.

“The broader market and crude futures are down sharply on the proposed Cyprus bailout, while natural gas futures are in the green on yet another round of cold weather,” said analysts in the Houston office of Raymond James & Associates Inc. “Beyond today however, investors will likely focus on the actions of the Federal Reserve, which is set to meet again this week to reevaluate the pace of its $85 billion/month bond-buying program.”

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “In terms of the real demand consequences for oil, weak demand from Europe is most likely largely discounted. However, a weaker-than-anticipated Europe could have more far-reaching implications for global oil demand via a drag on China’s export activity and, consequently, that country’s overall economic performance.”

Positive economic momentum drove corporate stocks higher last week as the Dow Jones Industrial Average and Standard & Poor’s 500 Index “both gained nearly 1%, leaving the latter just 2 points shy of its all-time high,” Raymond James analysts reported. The front-month crude gained 2% last week on optimistic US economic data “while gas continued its recent run on large withdrawals driven by late-winter weather (plus 7% for the week and plus 16% year-to-date),” they said. Energy stocks followed suit, with the Oil Service Index and the SIG Oil Exploration & Production Index posting gains of 2% and 4%, respectively.

In other news, Raymond James analysts said, “After 3 straight years of oil production declines in the wake of the Macondo spill, 2013 is set to be the Gulf of Mexico's first year of growth since 2009. While production is likely to flatten out in 2014 and 2015, there is a very meaningful amount of volumes on deck for startup in the second half of the decade. In fact, based on the current schedule of major project startups, we expect the gulf to grow faster (in relative terms) through 2020 than the US onshore arena—a forecast that will surely seem counterintuitive for many energy investors who are saturated with constant news flow from shale plays. To be sure, this is a back-end-loaded growth curve, and there are plenty of heightened risks (not least of which is the regulatory environment), but the gulf's role in the domestic oil production surge (and hence the path towards oil independence) should not be overlooked.”

On Mar. 15, US President Barack Obama revealed his second-term energy policy without any major surprises and not “tipping his hand” on Keystone XL pipeline issue, Raymond James reported. “The headline goals include (1) cutting net oil imports in half between 2008 and 2020—something our supply-demand model indicates will happen as early as 2014; (2) reducing energy intensity in half between 2010 and 2030—a tougher but plausible target; and (3) doubling power generation from wind, solar, and geothermal between 2012 and 2020—again, a realistic target.”

He also called for creation of the Energy Security Trust, a $2 billion, 10-year fund for research and development of renewable and other clean energy technologies; a permanent extension of the production tax credit for wind power beyond its current 2013 expiration; and reinstating a 50% tax credit for trucks powered by natural gas, which expired several years ago. Since these proposals all require more government spending, Raymond James analysts said, “In the current political climate, we highly doubt that Congress (especially the House) will look favorably at any of these ideas.”

Energy prices

The April contract for benchmark US light, sweet crudes gained 42¢ to $93.45/bbl Mar. 15 on the New York Mercantile Exchange. The May contract climbed 44¢ to $93.82/bbl.

Heating oil for April delivery was up 0.95¢ to $2.94/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 2.25¢ to $3.16/gal.

The April natural gas contract escalated 6¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rebound 7.5¢ to $3.88/MMbtu.

In London, the new front-month May IPE contract for North Sea Brent rose 86¢ to $109.82/bbl. Gas oil for April advanced $8.25 to $918/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 74¢ to $106.62/bbl. So far this year, OPEC’s basket price has averaged $110.06/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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