MARKET WATCH: Oil prices end week with a surge

Oil prices surged June 14, with front-month crude up 2% for the week on reports the US will begin arming rebels in Syria. However, natural gas was down 2.5% in the New York futures market because of forecasts of mild weather.

“After a volatile week for US equities in which stocks experienced a selloff earlier in the week on renewed worries over monetary policy and a rally thereafter on positive economic data, the Standard & Poor’s 500 Index posted a loss of 1% overall,” said analysts in the Houston office of Raymond James & Associates Inc. The SIG Oil Exploration & Production Index fell 3% while the Oil Service Index was down 2%.

Iran election ‘bearish’

Meanwhile, relatively moderate cleric Hassan Rouhani won a surprise victory in Iran’s presidential election over the weekend, getting 50.7% of the vote and avoiding a runoff. He will take office in August, succeeding the virulently antiwestern two-term incumbent Mahmoud Ahmadinejad. Although an establishment figure, Rouhani won widespread support from reformists with plans to change Iran’s foreign relations to alleviate the economic impact of tough international sanctions.

“Even if the change Rouhani brings is mostly cosmetic, it is still incrementally bearish for oil prices, insofar as it will dissuade the West—at least temporarily—from intensifying pressure over Iran’s nuclear program,” Raymond James analysts reported. “The most bearish scenario would be if the European Union or other key markets suspend their oil embargoes in order to boost Rouhani's standing during his ‘honeymoon’ period. That could bring back over 500,000 b/d of Iranian oil production. But even without a sudden diplomatic breakthrough, it's safe to say that any talk of military action will be put on hold while the West watches Rouhani’s initial moves.”

A key issue will be “Rouhani’s stance on the Iranian military's involvement in Syria. While not in direct control of the armed forces, any influence on his part that helps achieve an Iranian exit from Syria would be welcomed by the West,” they said.

Rouhani’s election “provides a channel for this closely watched geopolitical undercurrent to shape sentiment and influence positioning in the market over the course of the year,” said analysts at Barclays Capital Commodities Research. “Since the start of the year, the premium associated with extreme geopolitical tail risks and its impact on balances had gradually receded to a lower tide as the global oil demand-supply equation balances comfortably.” However, they said, “Going into the second half of the year, the supply system is vulnerable to further stress (which have already started building up).”

The “sanction-compressed shortfall in Iranian crude exports” is the biggest factor among current geopolitical outages of oil supplies. Barclays analysts reported, “Iranian crude output is now pegged close to 2.7 million b/d (lower by 900,000 b/d from average levels produced in 2011).”

They also noted Libyan oil production is down 600,000 b/d from prerevolution levels due to protests at fields and terminals. Oil thefts and pipeline damage has reduced Nigerian production 300,000 b/d below 2011 levels, and crude export shipments Iraq “have continued to disappoint growth expectations,” they said.

“Overall, in terms of weighing outcomes and their impacts, under each of the possible scenarios, the return of Iranian crude to the market following an easing of international sanctions is likely to produce a bigger catalyst (to the downside for prices) rather than the status quo creating upward pressure (where stricter sanctions rolling in over the coming months remove more barrels from the market),” Barclays Capital analysts concluded.

Energy prices

The July contract for benchmark US light, sweet crudes escalated $1.16 to $97.85/bbl June 14 on the New York Mercantile Exchange. The August contract climbed $1.15 to $98.07/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.16 to $97.85/bbl.

Heating oil for July delivery advanced 2.27¢ to $2.96/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 3.54¢ to $2.80/gal.

The July natural gas contract, however, fell 8.1¢ to $3.73/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., regained 2.1¢ to $3.75/MMbtu.

In London, the August IPE contract for North Sea Brent rose 98¢ to $105.93/bbl. Gas oil for July jumped $18.25 to $897.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes climbed $2.07 to $103.33/bbl. So far this year, OPEC’s basket price has averaged $105.44/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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