MARKET WATCH: Crude oil slips from 2-year high

Energy prices declined Mar. 3 with the front-month crude contract slipping from a 2-year high to less than $102/bbl in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 4 -- Energy prices declined Mar. 3 with the front-month crude contract slipping from a 2-year high to less than $102/bbl in the New York market.

Traders apparently took profits out of the recent energy price rally after Venezuelan President Hugo Chavez said he had a plan to help resolve the Libyan crisis. Chavez suggested an intercontinental commission negotiate with Libyan ruler Moammar Gadhafi—a Chavez ally—and the opposition forces trying to oust him. However, the US, France, and rebel Libyan forces indicated no interest in a negotiated settlement that left Gadhafi in power.

“Despite talks of a possible peace deal, we find it difficult to see much common ground for a compromise between the rebels and the Gadhafi regime,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Furthermore,” Zhang added, “there are limited options available for external interventions. As far as oil supply is concerned, the biggest risk in Libya is any material damage to oil facilities. We expect the unrest to keep boiling up, which, in turn, keeps the oil market heated.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “The possibility of the Gadhafi clan being tried in International Criminal Court would make any negotiations very difficult. Moreover, prices could get a further boost as Mar. 11 nears. Bloggers in Saudi Arabia have called for demonstrations (Day of Rage) on Mar. 11 and Mar. 20 in the country.”

Meanwhile, Zhang said, “The term structures for both West Texas Intermediate and Brent weakened and the WTI-Brent spread also narrowed.”

Top oil prices
The global macroeconomy remains supportive of the oil market, “in conjunction with strong fund money inflows” into that market. However, Zhang reiterated, “We view oil at around $130/bbl as a potential inflection point for the global economy.”

Data this week from the Energy Information Administration “imply that 2009 finding costs support an oil price range near $55-75/bbl,” said Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC. However, he explained, “Correcting for rising costs in 2010-12 and strong gas reserves in the ‘barrels of oil equivalent’ figure, we still believe that a range of $75-100/bbl for oil is cost justified. If one adds geopolitical risk into the mix, current prices cannot be considered extreme, in our view.”

However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Most policy makers in the US [and] quite a few macro asset managers do not fully realize that the price of oil in the US is at $120/bbl and not at $102/bbl. WTI prices in 2011 cannot be compared to WTI prices in 2008 due to the increase in the spread between WTI and the US Gulf Coast crude oil values” (OGJ Online, Mar. 3, 2011).

Sieminski said, “The divergence of US benchmark WTI from the world's other crude oil benchmarks has played havoc with refining margins. US Gulf Coast WTI margins have benefited sharply from the benchmark's weakness, while refiners in Europe running Brent have suffered. In Asia, margins have generally held up as strong gains in middle distillates offset weakness in naphtha and gasoline.”

Jakob said, “In Europe, the geography most affected by the loss of Libya crude oil, cash crude oil differentials are globally weakening, and the front Brent futures have moved back to oscillating between a flat and a small contango structure. The loss of Libya crude oil supply is being compensated by a loss of crude oil demand as refineries reduce runs either for planned maintenance or for economical reasons for a lack of processing margins.”

He added, “Demand destruction is not an overnight but a lengthy process. Those nations that are subsidizing domestic oil prices will have to run greater budget deficits (Thailand is starting to run out of cash for its oil fund), which then turns into lower ratings, lower gross domestic product growth, etc.”

Zhang reported, “Yesterday the financial market was caught out by the European Central Bank’s hawkish signal of a rate rise next month. The euro jumped instantly. However, oil barely moved on the back of the ECB’s message. The somewhat strong correlation between oil and euro, seen throughout 2010, has broken down since the unrest in the Middle East and North Africa (MENA). In the US, the weekly employment numbers beat market expectations, which lent some support to WTI.”

Energy prices
The April contract for benchmark US light, sweet crudes reached $102.94/bbl in intraday trading Mar. 3 on the New York Mercantile Exchange but closed at $101.91/bbl, down 32¢ for the day. The May contract declined 39¢ to $103.09/bbl. On the US spot market, in a rare move, WTI at Cushing, Okla., broke step with the front-month crude futures price, dropping 84¢ to $101.36/bbl.

Heating oil for April delivery decreased 0.84¢ to $3.05/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.33¢, but its closing price was essentially unchanged at a rounded $3.03/gal.

Natural gas prices continued to fall. The April contract dropped 4¢ to $3.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 5¢ to $3.75/MMbtu.

In London, the April IPE contract for North Sea Brent crude climbed as high as $116.90/bbl before closing at $114.79/bbl, down $1.56 for the day and wiping out its gain from the previous session. Gas oil for March lost $5.25 to $959.50/tonne, ending a three-session rally.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes decreased 36¢ to $110.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets