MARKET WATCH: Japan destruction cuts oil price to 2-week low

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 14 -- Front-month crude fell again Mar. 11 for the fourth consecutive session in the New York futures market, down 6% in that period to a 2-week low, including a 2% decrease on the last day of the week. Oil prices were down in early trading Mar. 14.

“The oil market is currently having to keep an eye on several moving targets at once, all of which could have potentially explosive consequences for prices,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “The unfolding story of unrest in the Middle East, continued production disruption in Libya, and the impact of the huge earthquake in Japan are each buffeting prices in different directions, increasing the volatility in the market. But there are now tentative signs that the oil price rally that drove North Sea Brent futures to a peak [of nearly] $120/bbl may be drawing breath. The devastating Japanese earthquake and subsequent tsunami led to a drop of around $2/bbl.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Although the situation in the Middle East and North Africa region remains turbulent, the market has appeared to shift its focus slightly away from it. Mixed economic news last week, high oil prices, and the reemergence of the European sovereign debt crisis heightened the concerns over the strength of the economy. The Japan earthquake has added to the woes.”

Zhang said, “In Libya, Moammar Gadhafi’s army appeared to have made some advance, by taking over the oil town, Brega, over the weekend. Meanwhile, the Arab League called on the UN to enforce a non-fly zone over Libya, which increases the possibility of some form of international military intervention.” In addition, he noted “large-scale protests” were reported in Bahrain over the weekend.

The international community’s stance is “decisively” moving against Gadhafi, said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. However, he said, “We don’t expect any quick-fix to Libyan situation and a path to peace might finally come via a military solution. We think that the troubles in Bahrain would keep the Saudi ruling elite on its toes as the Shia uprising in Bahrain would expand Iran’s sphere of influence too close for Saudi’s comfort and would lead to even more regional tensions. The expected lower demand in Japan due to the refining capacity shutdown will offset some of the Middle Eastern risk premium, and the European debt issues might become the arbiter of price direction at present.”

Massive infrastructure damage in Japan disrupted 1.3 million b/d of crude processing capacity.

In Houston, analysts at Raymond James & Associates Inc. noted, “While unrest in the Middle East continued, Saudi Arabia's planned ‘Day of Rage’ [on Mar. 11] did not materialize as police patrolled streets and set up checkpoints to keep protestors from gathering.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “With the price set back in crude oil, energy was the worst-hit sector in the Standard & Poor’s 500 index” in Mar. 11 equities trading.

He noted, “Retail sales data [are] not yet showing the impact of higher gasoline prices, but a sharp drop in consumer confidence reported by the University of Michigan will be an additional warning flag. The drop of consumer confidence in early March has wiped off all the gains made since the start of QE2 [the second phase of the Federal Reserve System’s quantitative easing program to stimulate the economy]. The index fell by 9.3 points, and that was way beyond the expected loss of only 1.2 points. Banks are starting to revise lower their gross domestic product forecast for the US, and if the reconstruction efforts in Japan at one stage will be positive for GDP, in the next few months we have to look for some lower industrial output due to the lack of power and as well a drop in Japanese consumer confidence.”

Energy prices
The April contract for benchmark US light, sweet crudes dropped $1.54 to $101.16/bbl Mar. 11 on the New York Mercantile Exchange. The May contract lost $1.57 to $102.35/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.54 to $101.16/bbl.

Heating oil for April delivery declined 1.59¢ to $3.03/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 3.19¢ to $2.99/gal.

The April natural gas contract increased 5.9¢ to $3.89/MMbtu on NYMEX, “on speculation that the shutdown of some nuclear generation capacity…would cause more LNG being diverted to Japan to address the power generation shortfall,” said Sharma. On the US spot market, gas at Henry Hub, La., dropped 4¢ to $3.79/MMbtu.

In London, the April IPE contract for North Sea Brent crude was down $1.59 to $113.84/bbl. The new front-month April contract for gas oil gained $5.50 to $958.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell $1.53 to $109.18/bbl.

Contact Sam Fletcher at samf@ogjonline.com.