MARKET WATCH: Energy markets caught between MENA turmoil, Japan’s crisis

Energy prices generally increased slightly Mar. 16, regaining some of the previous session’s losses as markets remain torn between speculation that increased turmoil in the Middle East and North Africa (MENA) may disrupt crude supply while earthquake and tsunami damage in Japan might reduce demand.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 17 -- Energy prices generally increased slightly Mar. 16, regaining some of the previous session’s losses as markets remain torn between speculation that increased turmoil in the Middle East and North Africa (MENA) may disrupt crude supply while earthquake and tsunami damage in Japan might reduce demand.

The front-month crude contract in the New York market “rallied 2.5%” in Mar. 16 morning trade “due to spreading unrest in [MENA] and increased speculation that turmoil could spill into Saudi Arabia; however, concerns regarding Japanese demand tempered early gains leaving West Texas Intermediate up only 0.8% at the close,” said analysts in the Houston office of Raymond James & Associates Inc.

“Brent rose 1.9% to remain above the $110/bbl mark. Meanwhile, natural gas closed the day moderately lower as continued forecasts for mild weather and weak demand offset increased global heating fuel prices resulting from the catastrophe in Japan,” Raymond James analysts said.

However, the National Oceanic and Atmospheric Administration’s National Weather Service said Mar. 17 in its annual spring outlook that almost half the country “from the north-central US through the Midwest and the Northeast” faces above-average risk of flooding over the next few weeks. “For the third consecutive year, the stage is set for potential widespread, record flooding in the north-central US,” said Jack Hayes, director of NOAA’s National Weather Service. Severe floods could disrupt both US supply and demand while endangering economic recovery.

“Oil seemed in correction mode yesterday amid uncertainty over Japan’s nuclear safety and escalating tensions in Bahrain,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The WTI-Brent spread widened again as the Department of Energy reported a much smaller inventory draw [down 200,000 bbl to just over 40 million bbl] at Cushing, Okla., than the American Petroleum Institute. The term structure of ICE gas oil has moved into backwardation across the whole curve amid an anticipated increase of distillate demand from Japan.”

After the European Union “amended its policy on nuclear power yesterday, China also announced that it has suspended approval of new nuclear power stations and will carry out checks on existing reactors,” Zhang said.

In MENA, he said, “Tensions heightened yesterday as protestors clashed with the army in Bahrain. After the government declared a state of emergency, curfew was enforced in the capital Manama. The situation appeared to be brought under control by the government for now as no further demonstration has been reported since. Inside Libya, [Moammar] Gadhafi’s army is making further advance towards the territories occupied by rebels.” The situation in that region remains fluid.

US inventories
The Energy Information Administration reported the withdrawal of 56 bcf of natural gas from US underground storage in the week ended Mar. 11, exceeding the Wall Street consensus of a 43 bcf reduction. That left 1.6 tcf of working gas in storage, 1 bcf above the comparable storage level a year ago and 23 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories increased 1.7 million bbl to 350.6 million bbl in the week ended Mar. 11, surpassing the Wall Street consensus for a 1.3 million bbl gain. Gasoline stocks fell 4.2 million bbl to 225 million bbl in the same period, well below Wall Street’s call for a 1.5 million bbl decrease. Distillate fuel inventories dropped 2.6 million bbl to 152.6 million bbl, compared with analysts’ expectations of a 1.4 million bbl loss (OGJ Online, Mar. 16, 2011).

Zhang said, “Overall, the inventory change poses a more bullish picture for product cracks than its normal seasonal pattern.”

However, Olivier Jakob at Petromatrix, Zug, Switzerland, advised, “With the events in Libya, Bahrain, and Japan, little attention has to be paid to the weekly DOE reports.”

Jakob said, “We could stick to talking about the fundamentals of oil or the geopolitics of protests in Bahrain, but with the Japanese crisis we are starting to enter an area of systemic risk where assets can see extreme fluctuations without necessarily a fundamental justification as price movements can be linked to margin calls, cash issues, etc.” He noted an “already bizarre occurrence” Mar. 16 when the Federal Reserve System canceled a scheduled permanent open market operation (POMO) aimed at stimulating the economy, only to reschedule it later in the day “due to market volatility.”

After the regular New York session closed, there was “an extraordinary surge on the Japanese Yen currency crosses,” Jakob said, as the Yen shot to a record high against the US dollar on Mar. 17 from a record low on Mar. 16. “The Bank of Japan has invested massively to keep Japan's Nikkei index afloat; hence, that index cannot be used as an indicator of financial stability,” he warned.

“Volatility was a clear outlier in currencies yesterday,” said Jakob. “The market volatility index is starting to climb and if the Standard & Poor’s 500 index has managed to hold a close at about the start-of-the-year levels, we need to repeat that price movements across asset classes are starting to be erratic. And when that starts to happen, the risk of hedge funds being under pressure, forced liquidation, etc., increases and can trump fundamentals.”

Jakob observed, “If the situation in Daiichi does not significantly improve today, then it will be a very long weekend. Headlines out of Japan will continue to create wild swings across asset classes, for the better or the worse…. No one knows how the situation will unfold in Daiichi, but we continue to believe that on a flat price basis (long or short) one needs to remain cautious as we are in a stress test and not in a value-at-risk environment.”

The primary impact of the Japanese crisis on the energy market “will come from a rebalancing of the mix of energy sources for power generation and a rebalancing of oil products due to the shutdown of refineries and petrochemical plants,” Zhang predicted. “With the uncertainties from the MENA turmoil and Japan’s earthquake, the tail-risks for oil flat prices to both upside and downside have increased substantially. 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.”

Energy prices
The April contract for benchmark US light, sweet crudes recouped 80¢ to $97.98/bbl Mar. 16 on the New York Mercantile Exchange. The May contract regained 97¢ to $98.95/bbl. On the US spot market, WTI at Cushing was up 80¢ to $97.98/bbl.

Heating oil for April delivery gained 4.34¢ to $3/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 4.08¢ to $2.84/gal.

The April natural gas contract slipped 0.3¢ but closed virtually unchanged at a rounded $3.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 4.5¢ to $3.84/MMbtu.

In London, the April IPE contract for North Sea Brent crude rose $2.10 to $110.62/bbl. Gas oil for April gained $7 to $959/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 76¢ to $105.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets