Sam Fletcher
OGJ Senior Writer
HOUSTON, Feb. 23 -- Reacting to the escalating crisis in Libya, benchmark US crude shot up an amazing 8.5% to a 30-month high on Feb. 22, the last day of trading for the front-month March contract in the New York market.
“Unlike the Egyptian situation a few weeks ago, disruptions to crude oil supply are now a reality, with many Libyan oil fields and ports shut. The turmoil in Libya is unlikely to ease any time soon, as [strongman Moammar Gadhafi] has vowed to fight on. Furthermore, the contagion risk for political instability to other countries in this region remains high,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.
The same concerns that drove up oil prices also triggered the biggest 1-day drop since August in the broader equities market, with the Standard & Poor’s Index down 2% despite a positive consumer confidence report that same day. Another report said home prices fell 3.9% in the fourth quarter of 2010.
That prompted analysts in the Houston office of Raymond James & Associates Inc. to question if the recent stock market rally is “losing its legs.” They said, “We'll see, but it certainly seems to be concerned about the impact of rising oil prices on an economic recovery.” Meanwhile, natural gas closed “relatively flat,” they reported.
Because of only a slight gain in the front-month price of North Sea Brent crude, Zhang noted, its premium over West Texas Intermediate narrowed to $12.69/bbl on Feb. 22. “Unsurprisingly, the term structures for crude and oil products strengthened on the back of reduced oil supply from Libya,” he said.
A difficult market
The current oil market is difficult to trade, especially for technical traders, “given how dependent it is on the next headline out of Libya,” said Olivier Jakob at Petromatrix, Zug, Switzerland.
Jakob said, “The main support on WTI at $95/bbl held yesterday, and that will remain a level to monitor. On Brent we will watch the support on the Fibonacci line at $105/bbl. The main resistance level to watch on WTI is $98/bbl and then $100/bbl due to the layers of April calls positioned at that level. On Brent the first resistance to watch is on the recent highs at $108.70/bbl. Those levels are wide, but this remains for now a headline market until we can better assess the amount of crude supply disruption in Libya and the response from the International Energy Agency and Saudi Arabia.”
Jakob noted, “With Libya apparently stopping operations at the product terminals, Italy should be left with a few surplus cargoes of gasoline as it was sending 18% of its gasoline exports to Libya. Italy could as well keep some of those cargoes to build up some stocks as crude oil production in Libya is starting to be minimized.” Italy imports 360,000 b/d of crude from Libya and “does not hold strategic crude oil stocks on its territory but abroad through stock tickets. Hence, logistically even if the IEA releases stocks, it is likely to create some operational havoc that should stay supportive [of] the spreads in case of confirmed supply interruption,” Jakob said.
At Barclays Capital Commodities Research, analysts reported, “Two issues are likely to drive investment performance over the coming months. First, we expect unrest in the Middle East to cause volatility in prices, although we do not think it will limit oil supply significantly; second, we expect the strong cash position of the industry to support rising organic and inorganic spending. Given these factors, we see sustained high oil and rising coal prices and expect long-term outperformance from oil-leveraged exploration and production companies and oil service names in both equities and credit. These are the same investment calls we made 6 months ago, but valuations no longer benefit from the large post-Macondo discount, so we expect outperformance to be more moderate.”
They said, “The main reason we remain bullish on the long-term oil price is that field decline and constrained access to new exploration acreage mean new supply will struggle to keep pace with demand growth. Spare production capacity continues to fall from the 2009 peak as demand growth heads inexorably upwards. 2010 was a near-record year in this respect, with global growth at 3.3%. The supply-demand dynamics remain very constructive in 2011, with demand expected to increase by 2%, led by further strong growth in China and other emerging markets. We expect oil prices to follow an upward trend until the middle of the current decade, with lower spare capacity over time resulting in a greater sensitivity to geopolitical trends.”
Libya’s crude is predominantly low-sulfur and targeted to the European market. “Although Saudi Arabia has the spare capacity to fill the supply gap, the extra supply will mostly be high-sulfur crude,” Zhang noted. “This has significant implications for the oil market in terms of crude differentials and product spreads, particularly for the Mediterranean market.”
He said, “During the First Gulf War, crude oil prices doubled within a 2-month period despite incremental productions from Saudi Arabia. Today, the market would have jumped much more if not for high global oil inventories and the Organization of Petroleum Exporting Countries’ spare capacity. For now, the market is likely to have priced in some further disruption from places like Algeria as well but not disruptions from other major producers in the region like Saudi Arabia or Kuwait.”
Zhang added, “Should Brent crude oil reach $110/bbl, the world would be paying almost 6% of global gross domestic product towards oil—well above the 2-3% level seen between 1985 and 2005. Unlike in 2008, the current oil price spike is supply-side driven. Supply-side problems tend to result in more volatile commodity price action than does demand-driven tightness. This implies the oil price could spike much higher but equally drop like a stone when the crises in supply regions blow over.”
Energy prices
The expiring March contract for benchmark US light, sweet crudes jumped $7.37 to $93.57/bbl Feb. 22 on the New York Mercantile Exchange. The next front-month April contract shot up $5.71 to $95.42/bbl. On the US spot market, WTI at Cushing, Okla., followed the March contract’s lead, up $7.37 to $93.57/bbl.
Heating oil for March delivery escalated 7.95¢ to $2.79/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 5.08¢ to $2.60/gal.
The March natural gas contract dipped 0.9¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 4.2¢ to $3.89/MMbtu.
In London, the April IPE contract for North Sea Brent crude—having made its big advance Feb. 21 when the New York market was closed for the US Presidents Day holiday—inched up just 4¢ to $105.78/bbl. Gas oil for March gained $12.50 to $889.75/tonne.
The average price for OPEC’s basket of 12 reference crudes climbed $3.42 to $104.01/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
