MARKET WATCH: Mideast turmoil, improved economic figures lift oil prices

Oil prices rose across the board July 3 with front-month crude climbing 1.6% in the New York futures market as the Egyptian military forced from office Mohammed Morsi, Egypt’s first democratically elected president.

Backed by opposition factions and religious leaders, the generals took Morsi in custody, suspended Egypt’s constitution, and appointed an interim cabinet to run the country until new elections. On July 5, the turmoil escalated as the military fired on pro-Morsi demonstrators in Cairo. The Muslim Brotherhood that backed Morsi had organized protests in Cairo and other cities.

Meanwhile, Syrian troops backed by Lebanese Hezbollah militants pounded rebel positions in Homs, Syria, with artillery and airstrikes for the sixth consecutive day.

Fear that hostilities in the Middle East may spread and threaten crude supplies is buoying oil prices. Natural gas futures pared early losses July 3 to close with a gain although the Energy Information Administration reported a smaller-than-expected addition to underground storage in the week ended June 28. The Oil Service Index was up 0.4% while the SIG Oil Exploration & Production Index rose 0.8%. Crude and equity prices were higher but natural gas was down in early trading July 5.

Market factors

Analysts in the Houston office of Raymond James & Associates Inc. see three key points involving energy as a result of the second revolution in Egypt in less than 2½ years. “First, in contrast to the original revolution, which was part and parcel of the Arab Spring, this week’s political shift in Egypt is a stand-alone event and does not carry any international read-through,” they said. “Second, there was no disruption to Egyptian oil and gas production either during or after the original revolution. Oil output, for example, has held steady near 700,000 b/d (0.8% of global supply) since 2008.”

The third factor, they said, the impact of the Egyptian crisis on rising oil prices so far “has been a pure sentiment trade. We don’t envision this continuing unless the situation on the ground were to markedly deteriorate—a Syria-like scenario that seems a truly remote prospect in the context of Egypt’s much more pluralistic, open society.”

Marc Ground at Standard New York Securities Inc., the Standard Bank Group, said, “As expected, markets were quiet [July 4] as many participants outside the US opted for the sidelines and await the return of US traders (many US participants may extend their holiday into the weekend) and the much anticipated nonfarm payrolls” report to be released July 5.

Market focus, he said, “is firmly on US nonfarm payrolls data in that the Federal Reserve Bank’s decision to pare back quantitative easing [QE] hinges on future data flow (particularly surrounding the labor market). Broad guidance is that a 7% unemployment rate is required to end QE3 completely; the Fed baseline is that the labor market should reach this point by the end of the first half of 2014. Recent data flow (labor and other data) has served to strengthen the argument for the Fed to pare back bond purchases in the coming months, with market consensus clustering around the September meeting [of the Federal Open Market Committee, the Fed’s policy-making arm] as the most likely opportunity to start this tapering.”

Ground said, “The effect of Fed tapering on the dollar (strengthening) still looms large…. [W]e view the dollar’s reaction (and the related reaction in interest rates) to a paring in Fed bond purchases as a major downside risk to our price forecasts over the coming quarter.”

US inventories

EIA reported July 3 commercial US crude inventories fell 10.3 million bbl to 383.8 million bbl in the week ended June 28, far exceeding Wall Street’s consensus for a 2.3 million bbl draw. US crude stocks remain above average for this time of year, however. Gasoline inventories dropped 1.7 million bbl to 223.7 million bbl last week, counter to market expectations for an increase of 700,000 bbl. Gasoline stocks also are well above average, although both finished gasoline inventories and blending components declined last week. Distillate fuel inventories were down 2.4 million bbl to 120.8 million bbl. Analysts anticipated a 1 million bbl increase.

“The large crude drawdown came as a result of higher week-over-week refinery utilization (92.2% vs. 90.2% the previous week), and a 900,000 bbl decline in crude imports. Total petroleum demand was 8% higher [last] week as well, following [the previous] week's 3% increase,” Raymond James analysts said. “However, on a 4-week moving average basis, total petroleum demand is up merely 0.1% year-over-year. Cushing, Okla., inventories increased for the second consecutive week, rising 400,000 bbl to 49.7 million bbl, which is 2 million bbl higher than this time last year.

EIA also reported injection of 72 bcf of natural gas into US underground storage last week, below Wall Street’s consensus for a 74 bcf increase. That brought working gas in storage to 2.605 tcf, down 491 bcf from the comparable period a year ago and 30 bcf below the 5-year average.

“Front-month gas prices were trading down 2¢ to $3.63/Mcf immediately following the release,” Raymond James analysts reported. “Excluding weather-related demand, there was 4.2 bcfd of additional natural gas added to storage [last] week compared with last year, and we have averaged 4.25 bcfd looser over the past 4 weeks. The run-up in gas prices over $4/Mcf has clearly led coal to gain some share back vs. gas. However, less severe weather has whittled the year-over-year deficit 300 bcf from its peak north of 800 bcf, though we remain at a healthy deficit of 491 bcf. However, in order to fill enough gas for the winter heating season, we believe gas prices must remain elevated in order to spur enough gas-to-coal switching. By our math we need to run 4 bcfd looser for the remainder of summer in order to fill storage, a level which would require gas prices to average around $4/Mcf over this time period.”

Energy prices

The August contract for benchmark US light, sweet crudes continued escalating, up $1.64 to $101.24/bbl July 3 on the New York Mercantile Exchange where regular trading was closed July 4 for the US Independence Day holiday. The September contract climbed $1.69 to $101.11/bbl. On the US spot market, West Texas Intermediate at Cushing was up $1.64 to $101.24/bbl.

Heating oil for August delivery increased 4.98¢ to $2.95/gal on NYMEX. Reformulated stock for oxygenate blending for the same month jumped 5.49¢ to $2.84/gal.

The August natural gas contract rose 3.6¢ to $3.69/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5.5¢ to $3.52/MMbtu.

In London, the August IPE contract for North Sea Brent gained $1.76 to $105.76/bbl. Gas oil for July rebound $23.50 to $903.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.61 to $102.24/bbl July 3 and then rose to $102.39/bbl July 4.

Contact Sam Fletcher at samf@ogjonline.com.

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