MARKET WATCH: MENA strife boosts energy prices
Sam Fletcher
OGJ Senior Writer
HOUSTON, Mar. 23 -- Political strife in the Middle East and North Africa (MENA) coupled with a weakened dollar raised the front-month crude price 1.6% in the New York market, “reaching levels not seen since the earthquake in Japan,” said analysts in the Houston office of Raymond James & Associates.
After three successive wins, the broader equity market posted a loss, with the Standard & Poor’s 500 index slipping “a modest 0.4% on a relatively light day of trading as rising oil prices left investors pumping the brakes,” they said. “Meanwhile, natural gas prices rose more than 2% on colder forecasts and short covering, reaching a 6-week high.” Crude and gas prices continued climbing in early trading Mar. 23.
James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted reports that the military has joined protests against the government in Yemen. “Although Yemen only exports about 125,000 b/d crude oil on average, the country is critically important for its location on one of the world’s most strategic shipping routes. In addition, the contagion risk to neighboring Saudi Arabia is also a major concern to the oil market. As to Libya, there appears no clear end-game for the military intervention from the UN, which implies a prolonged period of conflict.”
Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said markets are worried by “uncertainties about the plan of action in Libya as the western powers squabbled among themselves, and Russia and China sharpened their criticism of the North Atlantic Treaty Organization campaign in the country.” He said, “Prices are also getting a lift on anticipation that the rebuilding efforts in Japan would drive up demand. Three of the six shutdown refineries in Japan resumed operations, providing a further boost.”
Temperatures in the next 2 weeks are expected to be below normal across the Northeast and the Midwest US. “Prices have maintained their recent support as the market is taking stock of the supply-demand situation after the last week’s [gas] storage number sent a small signal that the supply growth could end up being below market expectations, while the demand remains robust and continues to grow. We can even see a significant run-up in prices this summer, if the market starts to fear that a storage level of 3.8-3.9 tcf at the end of injection season will be difficult to achieve,” said Sharma.
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Between the shootings in Syria, the agitation in Yemen, and the tensions in Bahrain there will be plenty to watch for in the MENA at the end of the week after the Friday [Muslim Sabbath] prayers. We can now add to the list the continued activity of Hamas who after launching 50 rockets on Israel over the weekend has been sending rockets again towards Be’er Sheva and Ashod.”
Meanwhile, Jakob said, “With the opposition in Portugal risking a vote of defiance on the new austerity measures, the odds of Portugal hitting the bail-out button are increasing. Yields for the periphery of Europe are rising; the 5-year notes for Portugal are above 8% and have climbed to 10.4% for Ireland. The euro supportive argument is that when Portugal is bailed out it will easier to defend Spain and that it is getting more and more certain that the European Central Bank will increase rates in April to fight inflation. However, more austerity is also under way.”
During the first UN weekly meeting over Libya on Mar. 24, there is a risk China and Russia push for a slowdown of operations, he said.
US-Saudi relations
Jakob said, “A lot has been written recently about the US losing some of its political influence on Saudi Arabia. Saudi Arabia has stopped looking west for its future as it considers that demand west of Suez has peaked and is instead looking increasingly towards the East and obviously towards China. The exports of crude oil from Saudi Arabia to China have doubled compared to 2007, and Saudi Arabia is now exporting as much crude oil to China as to the US.”
He added, “With the increase of Canadian crude oil to the US, the increased usage of ethanol, and the increase exports out of Iraq, which all together will continue to reduce the US dependency on Saudi crude oil, we can see a trend where Saudi Arabia will export at least twice as much crude oil to China as to the US within 3 years. As the flows of oil exports shift so will the political influences over the whole MENA region.”
Saudi Arabia and Iran have benefited most from increased Chinese crude requirements in the first 2 months of 2011. “Chinese imports from Iran had dropped last year as Iran was under international focus after its protests, but they have since then steadily increased,” said Jakob. “Imports from Libya increased slightly and averaged about 130,000 b/d during January-February.”
He acknowledged, “Libya is still at a freight disadvantage for China, but we need to keep in mind that the Suez-Mediterranean (Sumed) Pipeline has been studying the possibility of reversing one of the lines from North to South. If the regime change wanted by the West in Libya does not go as planned and if China was able to gain greater access to Libya crude oil, it could relatively easily improve its transport economics from Libya by committing barrels for a reversal of the Sumed pipeline.”
In other news, Calvalley Petroleum Inc., Calgary, reported the supply of equipment has been disrupted “due to political developments in Yemen.” Company officials said they continue to operate all key areas of development, including production facilities and drilling activities, with available materials on hand. Calvalley operates its 50% working interest in Block 9 of the Masila basin in Yemen.
“Due to a recent attack on the export pipeline from Block 18 to the Ras Isa export terminal, Calvalley has stopped shipping oil to Block 18. Production from the Hiswah field continues and the produced crude oil is being stored in tanks at our CPF. We have a spare storage capacity to accommodate for an additional 7 days of production. Based on our experience with similar situations in the past, we expect that the export pipeline will be repaired within a few days. Thus, it is unlikely that a production shut-down will be required,” officials said.
Drilling of the Qarn Qaymah-3 (QQ-3) appraisal well was completed Mar. 8 to a total depth of 4,460 m including an open-hole section of 1,000 m in the fractured granitic basement. Wellbore image logs and electrical logs indicate the open-hole section encountered a number of fractured sections in the FGB. On Mar. 9, Calvalley began testing of QQ-3. Currently the well is undergoing pressure build up. The testing program is expected to be completed in April.
Calvalley is drilling the Ras Nowmah East-1 exploratory well, targeting both Qishn and Saar Formation similar to that of Ras Nowmah discovery. It expects to complete the well by mid-April and then mobilize the rig to Ras Nowmah field to drill two development wells.
US inventories
The Energy Information Administration said Mar. 23 commercial US crude inventories rose 2.1 million bbl to 352.8 million bbl in the week ended Mar. 18. That exceeded the Wall Street consensus for an increase of 1.5 million bbl, Gasoline stocks fell 5.3 million bbl to 219.7 million bbl in the same period, also out-distancing market expectations of a 2 million bbl decline. Both finished gasoline and blending components inventories were down. Distillate fuel inventories remained unchanged at 152.6 million bbl last week, despite a consensus for a 1.5 million bbl draw.
The American Petroleum Institute earlier reported US crude stocks increased 970,000 bbl to 350.8 million bbl in the week ended Mar. 18. Gasoline inventories dropped 7.9 million bbl to 222.4 million bbl, API said, while distillate fuel stocks were down 612,000 bbl to 155 million bbl.
Imports of crude into the US increased 306,000 b/d to nearly 9 million b/d in the latest week, EIA officials said. In the 4 weeks through Mar. 18, crude imports averaged nearly 8.5 million b/d, down 393,000 b/d from the comparable period in 2010. Total gasoline imports averaged 695,000 b/d last week, with distillate fuel imports at 192,000 b/d.
EIA reported input of crude into US refineries increased 167,000 b/d to 14.3 million b/d last week, with units operating at 84.1% of capacity. Gasoline production increased to 9 million b/d, while distillate fuel production climbed to 4.3 million b/d.
Energy prices
The new front-month May contract for benchmark US light, sweet crudes traded at $102.10-105.20/bbl Mar. 22 before closing at $104.97/bbl on the New York Mercantile Exchange, up $1.88 for the day. The June contract gained $1.80 to $105.52/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.67 to $104/bbl.
Heating oil for April delivery increased 2.37¢ to $3.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.71¢, but its closing price essentially was unchanged at a rounded $3/gal.
The April natural gas contract advanced 9.3¢ to $4.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 9.2¢ to $4.08/MMbtu.
In London, the May IPE contract for North Sea Brent crude gained 74¢ to $115.70/bbl. Gas oil for April escalated $9.25 to $987.50/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 13¢ to $110.23/bbl.
Contact Sam Fletcher at [email protected].