Sam Fletcher
OGJ Senior Writer
HOUSTON, Feb. 25 -- The March contract for natural gas dropped 2.7% to a 10-year low Feb. 24, expiring at the end of trade on the New York market. The April crude contract climbed above $103/bbl during the session but fell into the red in a late sell-off on a rumor Libyan ruler Moammar Gadhafi had been shot dead.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, said “Geopolitical risks put the market in a rather panicky mood yesterday, which is reflected in wide trading ranges in both Brent and West Texas Intermediate.”
Assurances—but no action yet—from Saudi Arabia that it would be able to offset supply disruptions also helped pull down oil prices. The International Energy Agency estimated production loss from Libya at 500,000 to 750,000 b/d at present.
However, what “was likely most responsible” for the sharp intraday drop in oil prices is that commodity exchanges such as the InterContinental Exchange (ICE) and the CME Group Inc. [the largest and most diverse derivatives marketplace] increased margin requirements for crude contracts “which forced some longs to take profits,” said analysts in the Houston office of Raymond James & Associates Inc.
The weekly government report on US oil inventories on Feb. 24 was largely ignored by traders (OGJ Online, Feb. 24, 2011). “And rightfully so as the only thing driving the market is the Libya situation and overall speculation as to which country is next. Large protests are being called for in Jordan today, and it would only take 1,000 people throwing shoes in Saudi Arabia to move oil prices another $5/bbl higher,” said Olivier Jakob at Petromatrix in Zug, Switzerland.
He said, “Friday in revolutionary times is usually a day full of rumors, and of all the scenarios, we do not want to discount the possibility that we come back on Monday to learn [Gadhafi] has fled to Zimbabwe over the weekend. The UN Security Council has already called for an end to the violence and could meet again later today. One of the options that could be considered by the UN or the North Atlantic Treaty Organization is an imposition of a no-fly zone, and that means Gadhafi would have to fly out before that. Some members of his family have already tried flying out to other destinations but have been turned off.”
Zimbabwe would be a likely destination for the Gadhafi family since he “owns vast areas of land there (received as a payment for oil) and a large stake in the Commercial Bank of Zimbabwe (that can always be helpful). There is also some speculation that some of the foreign mercenaries used in the repression were flown in from Zimbabwe,” Jakob said.
While the quality of additional Saudi oil that can be brought on-stream is not as good as Libyan oil, Jakob said, “The global refining system is not as stretched as in 2008 and that should allow for a greater flexibility in the composition of the crude slates.”
Since Gadhafi has already lost control of Libya’s oil-producing provinces, Jakob suggested, “It would not take great efforts for multinational troops to move in for humanitarian reasons and then set up an interim administration that would then also make sure that the oil flows (a mini-Iraq scenario).”
Zhang said, “The term structure in Brent strengthened further and put the market in the steepest backwardation since mid-2008.” That shift, he said, “is more reflective of a rush to secure supplies rather than a sharp increase in physical demand. In contrast to 2008, ICE gas oil is still in contango, which signals a subdued product market. Unsurprisingly, some European refineries have been reported as cutting runs on the back of negative refining margins.”
Energy prices
The April contract for benchmark US light, sweet crudes climbed as high as $103.41/bbl in intraday trading Feb. 24 on the New York Mercantile Exchange before closing at $97.28/bbl, down 82¢ for the day. The May contract fell $1.08 to $98.74/bbl. On the US spot market, WTI at Cushing, Okla., was down 37¢ to $95.98/bbl.
Heating oil for March delivery lost 2.76¢ to $2.88/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.18¢ to close at $2.72/gal.
The expiring March contract for natural gas dropped 10.7¢ to $3.79/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.7¢ to $3.82/MMbtu.
In London, the April IPE contract for North Sea Brent increased 11¢ to $111.36/bbl. Gas oil for March gained $14.50 to $925/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes jumped by $5.13 to $111.01/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
