MARKET WATCH: Energy prices fall as OPEC mulls emergency meeting

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 9 -- Energy prices fell Mar. 8, with crude down 0.4% in the New York market after members of the Organization of Petroleum Exporting Countries indicated they may call an emergency meeting prior to their scheduled June gathering to discuss supply disruptions and a possible production increase.

While lost production from Libya is estimated at 1 million b/d, Saudi Arabia alone claims to have 3.5 million b/d of spare capacity, albeit heavier and with greater sulfur content than some refineries can process. However, analysts in the Houston office of Raymond James & Associates Inc. said, “The Kingdom has announced that it is taking steps to develop a special light, low-sulfur crude oil blend similar to Libyan-quality crude in order to help offset the loss of production.”

Such comments comforted traders, but there are other problems within OPEC that could prevent an official meeting. With Moammar Gadhafi and Libyan rebels locked in combat, said Olivier Jakob at Petromatrix, Zug, Switzerland, “Any representative of Libya at the meeting would legitimize one side or the other; by the same token excluding Libya from an OPEC meeting while it is still a sovereign state is a difficult decision to take. Hence, it probably is easier for political reasons for OPEC to work outside a formal framework (OGJ Online, Mar. 8, 2011).”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, earlier noted market concerns over the “Day of Rage” protests scheduled via the internet for Mar. 11 in Saudi Arabia. “While the fighting in Libya is driving daily sentiment in the markets, we would be closely watching the upcoming events in Saudi Arabia since those could potentially have much bigger and far-reaching consequences,” he said (OGJ Online, Mar. 8, 2011).

However, Sharma reported Mar. 9, “The call for protests in Saudi Arabia lost some of its traction under criticism from the religious scholars in the country.”

In other news, Jakob reported, “The Brent-WTI [spread] was a downward momentum trade during February and an upward momentum trade in March. We have not tried to rationalize the Brent premium to WTI during February, and we still believe that it will be a very volatile spread to trade as long as the exchanges continue to offer a margin offset on the trade [that] does not correspond to the volatility of that spread. Since Mar. 1 the Brent premium to WTI has narrowed by $7.75/bbl, which in other words means that if Brent is the world’s benchmark then the crisis in Libya only brought a $10/bbl premium to crude oil (Brent is now only $1/bbl higher than at the end of February).”

Jakob said, “The front spread continues to narrow in WTI while the Brent front spread moves more into a contango, which we think is evidence that some of the box spread trades are being unwound. Meanwhile, the fundamentals of Cushing, Okla., have not really changed; if anything they have gotten worse.”

Sharma at Pritchard Capital said, “Given the brimming inventory situation at Cushing and no near-term respite in sight to debottleneck the Cushing to Gulf Coast transport, the Brent-WTI spread could stay in the $5-10/bbl range for a protracted period, or at least until the Cushing inventories get worked down.”

US inventories
The Energy Information Administration said Mar. 9 commercial US crude inventories gained 2.5 million bbl to 348.9 million bbl in the week ended Mar. 4, outstripping Wall Street’s consensus for a 1 million bbl increase. Gasoline stocks fell 5.5 million bbl to 229.2 million bbl within the same period, far exceeding market expectations of a 1.5 million bbl decrease. Both finished gasoline and blending component stocks were down. Distillate fuel inventories dropped 4 million bbl to 155.2 million bbl, much lower than analysts’ consensus of a 500,000 bbl decline.

The American Petroleum Institute earlier reported a 3.8 million bbl build in US crude stocks during the same week. Gasoline inventories dropped 3.7 million bbl to 230.7 million bbl, said API, while distillate stocks declined 1.47 million bbl to 156.1 million bbl.

Imports of crudes into the US increased last week by 290,000 b/d to 8.3 million b/d. In the 4 weeks through Mar. 4, crude imports averaged 8.2 million b/d, down 669,000 b/d from a comparable period in 2010, said EIA officials. Gasoline imports (including both finished gasoline and gasoline blending components) averaged 761,000 b/d in the latest week, while distillate fuel imports averaged 252,000 b/d.

The input of crude into US refineries increased by 145,000 b/d to 13.9 million b/d last week with units operating at 82% of capacity. EIA said gasoline production decreased to 9 million b/d, and distillate fuel production declined to 4.1 million b/d.

Energy prices
The April contract for benchmark US light, sweet crudes dropped 42¢ to $105.02/bbl Mar. 8 on the New York Mercantile Exchange. The May contract fell 78¢ to $105.95/bbl. On the US spot market, WTI at Cushing was down 42¢ to $105.02/bbl.

Heating oil for April delivery declined 5.46¢ to $3.01/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 5.72¢ to $2.95/gal.

The April natural gas contract lost 6.3¢ to $3.86/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 7¢ to $3.83/MMbtu.

In London, the April IPE contract for North Sea Brent crude dropped $1.98 to $113.06/bbl. Gas oil for March tumbled $26.75 to $949.75/tonne.

The average price for OPEC’s basket of 12 reference crudes fell $2.48 to $109.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com.