Sam Fletcher
OGJ Senior Writer
HOUSTON, Jan. 28 -- The price spread between front-month benchmark US light, sweet crudes and North Brent oil widened to a record $11.75/bbl Jan. 27, prompting speculation the higher priced Brent should replace West Texas Intermediate as the market’s usually quoted benchmark.
Energy prices reversed again in the New York market, giving back much of the gains from the previous session, due to weak economic data and talk that the Organization of Petroleum Exporting Countries may increase production.
Moreover, a 10 bcf reclassification of working gas in US storage in the Energy Information Administration's Jan. 27 weekly report “helped to paint a much more bearish picture, pushing gas 4% lower,” said analysts in the Houston office of Raymond James & Associates Inc. “Oil prices (WTI, that is) hit 2-month lows as the bloated inventory picture at Cushing, Okla., is taking its toll on the front-month prices. On the other hand, Brent held up much better during the session.”
They said, “Until the Cushing storage picture loosens, we're taking our cues from Brent as a more suitable global indicator.” Some analysts, however, question whether Brent prices are representative of the market.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “In the absence of significant developments in oil supply and demand, the oil market was led by the US economic data yesterday. The US weekly initial jobless claims numbers jumped to 454,000 from 404,000 seen in the previous week, much higher than the expected 405,000. In addition, the US December durable goods orders fell by 2.5% month-to-month, much lower than the consensus of 1.5% increase. Both weighed on the oil prices.”
He said, “For the week ahead, we expect the tug of war between WTI and Brent to continue, as Brent seems to be targeting $100/bbl again while WTI could breach $85/bbl to the downside. Right now, we see a higher probability of WTI dragging Brent down than the converse. Consumers may therefore…take advantage of the current weakness in the market.”
Despite Brent’s momentum toward $100/bbl, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “We fail to find the catalysts to justify the need for such a price. On the supply side, there has been a change of tone from the key OPEC members while on the demand side from the Chinese tightening to the riots of North Africa the signs are clear that we are starting to eat into disposable income and the political instability that comes with it. Oil markets are globally not shifting out of the contango structure (the opposite) and apart from momentum trading, we do not see the justification for Brent to be at $100/bbl especially when cash crude in Europe has to be done at weaker differentials.”
Jakob said, “A few days ago it was the Saudi oil minister being a bit more dovish about OPEC production, yesterday it was the head of the Kuwait Petroleum Co. (not the oil minister, but still relevant) that is nervous about the impact of the current oil prices, while the International Energy Agency continues to claim that Saudi Arabia is pumping more oil.”
He noted the “risk of more bloodshed” in Egypt as demonstrators protest against their government. Middle East governments are worried about the spreading civil unrest in that area. “If Saudi Arabia might have not wanted to fight with the speculators in the fourth quarter of 2010, we are not sure that they want to fight with the protestors in the first quarter of 2011,” Jakob said. “It is not stability in Saudi Arabia [that] is at risk per se but stability in the Saudi sphere of influence. The street protests are very fresh and new inputs, and we would not discount their impact on the decision making of Saudi Arabia.”
Jakob said, “Commodity inflation is a real issue unless you are working for the US Federal Reserve, and Saudi Arabia does not need to wait for an OPEC meeting to pump more oil out. Anyway, with some of their refineries going into maintenance, Saudi Arabia can mathematically export more crude oil while claiming that it is still respecting its production quota.”
Energy prices
The March contract for benchmark US light, sweet crudes fell $1.69 to $85.64/bbl Jan. 27 on the New York Mercantile Exchange. The April contract dropped $1.06 to $88.29/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.69 to $85.64/bbl. Heating oil for February delivery declined 1.52¢ to $2.65/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month retreated 4.9¢ to $2.38/gal.
The February natural gas contract dropped 17.5¢ to $4.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 4.6¢ to $4.36/MMbtu.
In London, the March IPE contract for Brent crude declined 52¢ to $97.39/bbl. Gas oil for February gained $7 to $817/tonne.
The average price for OPEC basket of 12 reference crudes increased 84¢ to $93.42/bbl.
Contact Sam Fletcher at [email protected].
