MARKET WATCH: Front-month crude slips in mixed market

Front-month crude prices slipped lower July 8 in UK and New York markets, but the front-month US natural gas contract jumped 3% with forecasts of higher temperatures in coming weeks, especially in the densely populated Northeast.

“Oil prices were down slightly after a rally last week on heightened Middle East concerns,” said analysts in the Houston office of Raymond James & Associates Inc. “Against this backdrop, the Oil Service Index posted a gain of 1% while the SIG Oil Exploration & Production Index remained relatively flat.”

At Standard New York Securities Inc., the Standard Bank Group Oil, analysts reported, “Markets continued to flip-flop, caught between geopolitical concerns and fears over the effect the Federal Reserve’s tapering [of stimulation spending] might have on speculative activity and the dollar.”

With mounting tensions in Egypt, geopolitical concerns recently have had the upper hand. On July 9, Egypt’s Muslim Brotherhood rejected a fast-track timetable by the military-backed interim leadership for amending the Islamist-drafted constitution and for parliamentary and presidential elections by early next year.

Heading into earnings season, the Standard & Poor’s 500 Index advanced 0.5% July 8 “largely due to gains early in the trading session driven by positive Euro-zone news,” said Raymond James analysts.

They also noted the original project timeline for the Keystone XL pipeline projected Canadian oil sands production would be flowing through it to the Gulf Coast by now. “Alas, in the 3-plus years since this project was first hatched, the Keystone XL soap opera has done little more than garner headlines and serve as political fodder,” Raymond James analysts said. “Without the pipeline infrastructure in place to get past Cushing, Okla., the Canadian heavy oil benchmark (Western Canadian Select) has wallowed at an average $30/bbl discount to its comparable global heavy crude benchmark since the start of 2013.”

Eventually, they said, “We believe oil sands supply will find its way down to the Gulf Coast with or without Keystone XL. In fact, we believe the start-up of several other pipelines should alleviate the Canadian oil sands logjam by mid-2014, serving to prop up WCS pricing. Looking out over the next 2½ years, the industry is projected to bring online over 1 million b/d of heavy-focused Midwest-to-Gulf Coast pipeline capacity on top of 300,000-plus b/d of incremental crude-by-rail loading capacity out of Alberta.”

Even if Keystone XL were “given the green light today, it still wouldn’t start up until the second half of 2015,” Raymond James analysts said. “Keystone XL will not be especially relevant over the next several years, although the steady growth of oil sands supply is likely to catch back up to pipeline infrastructure by 2017.”

Meanwhile, a July 6 train derailment reportedly involving 72 tanker cars of oil set off explosions that destroyed 30 buildings in the small Quebec town of Lac-Megantic, killing at least five people and forcing a third of the 6,000 residents to flee their homes (OGJ Online, July 8, 2013).

Although the cause of the accident is still under investigation, Raymond James analysts say it is likely to trigger stricter regulation of rail movements of oil in the US as well as Canada. At the same time, others speculate it may bolster arguments that the Keystone XL pipeline would be a safer means of transporting oil.

Energy prices

The August contract for benchmark US light, sweet crudes slipped 8¢ to $103.14/bbl July 8 on the New York Mercantile Exchange. The September contract dipped 3¢ to $103.02/bbl, but subsequent monthly contracts posted gains. On the US spot market, West Texas Intermediate at Cushing also was down 8¢ to $103.14/bbl.

Heating oil for August delivery declined 0.96¢ to $2.98/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 1.31¢ to $2.88/gal.

The August natural gas contract, however, jumped by 12.4¢ to $3.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 12.14¢ to $3.66/MMbtu.

In London, the August IPE contract for North Sea Brent decreased 29¢ to $107.43/bbl. Gas oil for July advanced $1.50 to $913.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes rose 76¢ to $103.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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