MARKET WATCH: Crude price rebounds after weekend combat in Libya

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 21 -- The front-month crude price slipped 0.4% Mar. 18 in the New York market only to jump 1.9% in early trading Mar. 21 after Libyan strongman Moammar Gadhafi broke his brief ceasefire, triggering reprisal airstrikes over the weekend by members of the North Atlantic Treaty Organization.

“Natural gas remained [essentially] unchanged Mar. 18, resting at a 6-week high following a larger than expected draw in storage and speculation regarding LNG demand from Japan,” said analysts in the Houston office of Raymond James & Associates Inc. “The broader markets gained 0.4% after the promise of ceasefire and the G7 coordinated an intervention in the currency markets to support the yen.”

Meanwhile, they reported, “The head of the national oil company said Libya may in the future bypass the traditional bidding process and instead award contracts directly to producers from countries that oppose the NATO action, such as China, India, and Brazil (all of which abstained at the Security Council). As for existing contracts, he took a more subtle position, saying that ‘we are still considering all our contracts and agreements with the oil companies valid,’ but ‘if the work force is not coming…we are of course in talks with other people to bring staff.’ The implicit threat appears to be that, if western majors don't return their personnel quickly—which is inconceivable in the middle of war—the regime could try to effectively displace them.”

Olivier Jakob at Petromatrix in Zug, Switzerland, observed, “One risk that seems inevitable is that the coalition’s imposition of a no-fly zone will quickly transform itself into air support for a rebel’s offensive. Then the humanitarian operation becomes a war by proxy and explains why the US wants to quickly hand over the command of the operations to the other coalition partners. The Arab league is already having some second thoughts, and this is likely to accelerate when the mission transforms.”

Jakob pointed out, “In the short term the attacks [by] the coalition do not change much as [oil] exports were already down to almost zero.” He added, “A stalemate at current positions leaves most of the oil export ports in the hands of the Gadhafi regime and is therefore increasing the chances that the rebels will have to move back to the offensive to regain Adjabiya, Brega, and Ras Lanuff. If with the air support from the coalition, then it will be difficult not to make it a battle for oil, and this is probably another reason why the US does not want to have command of the operations.”

In other news, Jakob said, “There will be an increasing focus on Yemen following the massive shootings of last week. Yemen produces about 230,000 b/d of crude oil. About a third of it goes to China, none to Europe or the US.”

Although recently overshadowed by military action in Libya, Japan’s nuclear crisis still “is offering some bearish potential that is countering the bullish potential out of the Middle East,” said Jakob. The longer it takes to resolve that crisis, “the longer it will take for the Japanese economy to restart and the more impact it could have on the industrial production in other countries,” he said.

Raymond James analysts said, “The crisis in Japan throws into question the future of nuclear power, both in the US and internationally. While it's unlikely that a large number of nuclear reactors are forcibly mothballed immediately, the regulatory process for future projects is bound to get even more difficult than it has been. This comes against the backdrop of an aging nuclear industry, with an estimated 143 reactors (out of 443) set to close by 2030. With this in mind, other low-carbon power sources—natural gas, to a lesser extent renewables, and longer-term clean coal—will increasingly need to fill the gap.”

Since the UN resolution is limited to protecting civilians and explicitly forbids the use of force to oust Gadhafi, it is “more likely” military action “will prolong the strife that has resulted in the shutdown of 1.2 million b/d of Libya’s 1.6-million b/d production capacity,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. The resolution also authorized “all necessary measures” to protect civilians against Gadhafi's forces, “something that is important given that the advances against the rebels have been achieved largely through superior artillery rather than air power,” they said. “The resolution also expands sanctions on the regime, freezing the assets of the National Oil Corp. and the central bank. This should at least in theory make it impossible to trade Libyan oil, even if it were to be produced again, for instance in the event that Gadhafi were to regain control of the country by retaking Benghazi and other rebel-held towns such as Tobruk.”

KBC analysts noted the Mar. 18 coordinated effort by the world’s main central banks to pressure the Japanese yen “back to the pre-earthquake level.” They reported, “The euro yen did move back to the pre-earthquake level, but the dollar yen is still below the pre-earthquake level and that means that the euro has gained further to the dollar during the week.”

In the interim, James Zhang at Standard New York Securities Inc., the Standard Bank Group, said the term structure for West Texas Intermediate remained broadly unchanged, while the backwardation in Brent got steeper. “In addition, gas oil and heating oil cracks weakened after the recent strong rally following Japan’s earthquake,” he said.

“Although the reduced refining capacity in Japan will support refinery margins and product cracks in general, we don’t see significant upside in the margin and cracks, given the abundant spare capacity in the global refining industry. Instead, we view it as an opportunity for margin-hedging,” said Zhang.

Analysts at the Centre for Global Energy Studies (CGES), London, pointed out global oil demand growth is proving remarkably robust in the first quarter of 2011 despite soaring prices.

However, they said, “Over the past month, the world has lost most of Libya’s…oil supply, as production and exports have slowly ground to a virtual halt. The Organization of Petroleum Exporting Countries, meanwhile, has continued to insist that there is no need for it to take any action, since the world remains well supplied with oil. In an apparent contradiction of this assertion, Kuwait’s oil minister was quoted by the country’s official news agency as saying that ‘there are a lot of lifters that are asking for additional Kuwaiti crude oil volumes.’ However, he went on to add that the higher demand did not mean that Kuwait was exceeding its output quota, despite holding 1 million b/d of spare capacity.”

‘Heart of the problem’
CGES analysts said, “This is the heart of the problem that the oil market faces at the moment. Buyers clearly want more oil from OPEC than it is currently producing, yet those with spare capacity seem to be doing very little. Furthermore, what they are doing is far from clear, at a time when the market desperately needs transparency from the world’s swing producers.”

They noted, “Saudi Arabia clearly faces troubles much closer to home than North Africa. The protests in neighboring Bahrain have already dragged in its troops, angering Shia-dominated Iran across the gulf. In such circumstances, it would not be surprising if the attention of Saudi Arabia’s government was not focused entirely on the oil market.”

CGES said the world will need 30.3 million b/d of oil from OPEC in the second quarter, “just to keep quarterly oil prices around $110/bbl.” February production was estimated at 29.85 million b/d and is now down to 29 million b/d. “Saudi Arabia has tried to assure customers that it can and will raise production to meet their demands, but tanker tracking data suggest that production has only risen by around 200,000 b/d since the Libyan crisis broke out, far less than required to raise aggregate OPEC production to where it needs to be to balance the market,” the analysts concluded.

The average price for OPEC’s basket of 12 benchmark crudes gained $2.46 to $110.54 bbl on Mar. 18. So far this year, that basket price has averaged $99.75/bbl.

“Dated Brent has traded on average $3/bbl higher. WTI meanwhile appears to be in a different world, reacting more to local issues in the US Midcontinent rather than those on the international stage for much of the first quarter. After falling while other key grades were rising until mid-February, the price of the US benchmark looks set to average little more than $90/bbl in the first 3 months of the year,” CGES analysts said.

Energy prices
The April contract for benchmark US light, sweet crudes declined 35¢ to $101.07/bbl Mar. 18 on the New York Mercantile Exchange. The May contract dropped 54¢ to $101.85/bbl. On the US spot market, WTI at Cushing, Okla., was down 35¢ to $101.07/bbl.

Heating oil for April delivery decreased 4.06¢ to $3.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.12¢ but closed essentially unchanged at a rounded $2.95/gal.

The April contract for natural gas inched up 1¢ to $4.17/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rose 9.5¢ to $3.94/MMbtu.

In London, the May] IPE contract for North Sea Brent fell 97¢ to $113.95/bbl. Gas oil for April lost $2 to $972.25/tonne.

Contact Sam Fletcher at [email protected].