Market Journal

May 15, 2006
After 2 days of sharp declines, the June crude contract again climbed above $70/bbl May 5 in the New York market as the US, UK, and France pushed the United Nations Security Council for a resolution demanding Iran quit enriching uranium.

Political, financial problems batter markets

After 2 days of sharp declines, the June crude contract again climbed above $70/bbl May 5 in the New York market as the US, UK, and France pushed the United Nations Security Council for a resolution demanding Iran quit enriching uranium.

Thus the first week of commodity trading in May ended the way it began, with crude prices rising on traders’ fears of supply disruptions due to Iran’s nuclear program and continued unrest in Nigeria.

“In addition, Bolivia’s move to nationalize its oil and natural gas assets raised concern that a wave of similar such actions throughout Latin America could negatively impact energy investment and ultimately oil supply,” said Robert S. Morris, Banc of America Securities LLC, New York, on May 8. “However, the momentum for oil prices turned around at mid-week after an unexpected build in US crude oil and gasoline inventories was reported. At the same time, US gasoline demand for the past 4 weeks has been flat versus 1 year ago, although some of the data may be mired by the shift in inventories in preparation for the change in blending specifications, which is effective this week.”

Market concerns remain

Analysts at Raymond James & Associates Inc. in Houston said crude futures prices were likely to drift lower with reports Iranian President Mahmoud Ahmedinejad was to contact US President George W. Bush seeking resolution of the standoff. “Though not the olive branch that would resolve the deadlock, markets look at this as a diplomatic measure in the right direction. Moreover, gas prices at the pump are likely to ease . . . as refiners get better with ethanol switching. We await the onset of the driving season to possibly reverse this trend, assuming consumers show enough heart to drive with the same enthusiasm as is usual,” said Raymond James analysts.

At Petromatrix Gmbh, Zug, Switzerland, analysts see long-term support for crude and petroleum products prices with global production and refining systems stretched to near limits and the chance of additional disruptions by hurricanes and political instability in Nigeria, Iraq, and Iran. However, they said the downward corrective cycle is not yet over due to several factors, including the potential breakdown of the New York harbor unleaded (HU) gasoline futures contract during the switchover to the reformulated blendstock for oxygen blending (RBOB) futures contract. Both are traded on the New York Mercantile Exchange, based on delivery at petroleum products terminals in the harbor from refineries in the New York area or from the Gulf Coast.

Because HU gasoline faces “a contractual death in January 2007,” commercial interests are moving to the RBOB contract. Petromatrix fears that, in time, only speculators and institutional investors will be left holding HU contracts. “The HU contract is a physical delivery contract, and the majority of the contract holders will now be in the hands of financial interests that cannot take physical delivery. Hence they cannot bring the contract they are holding to a ‘natural’ death, and there is a real risk that they will not find enough off-takers for their position. As the RBOB contract is now gaining market share, the risk of the HU breakdown is increasing,” said Petromatrix analysts.

Meanwhile, refining margins have spiked due to a 10% decline in gasoline inventories over the past 9 weeks and concerns that the switch from methyl tertiary butyl ether (MTBE) to ethanol as an oxygenate in reformulated gasoline (RFG) would cause further supply problems, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Although Bush called for lifting US tariffs on imported ethanol, Morris said, “This would be a contentious issue in Congress, and we believe it is unlikely anything will come of it. Thus, any supply disruptions or spikes in gasoline prices related to the switchover to ethanol-based from MTBE-based gasoline are likely to be at their worst this week. Subsequently, with US crude oil inventories at the highest level since May 1998, any further upside to oil prices near-term is likely to be driven by geopolitical tensions, most notably by the nuclear stand-off with Tehran.”

As for natural gas, analysts at Enerfax Daily said May 8 they saw “not much evidence of new demand in the last several weeks, and lower prices are likely in the offing.”

Morris at Banc of America said composite spot natural gas prices also retreated, due largely to weak seasonal cooling or heating load demand, the decline in oil prices, and plentiful domestic natural gas storage inventories.

(Online May 8, 2006; author’s e-mail: [email protected])