MARKET WATCH: WTI, natural gas prices continue climbing

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 8 -- Crude oil prices continued climbing Mar. 7 to a 29-month high, closing above $105/bbl on the New York market. Natural gas jumped 3.1%, again approaching $4/MMbtu, on a bullish rig count and on short covering after the prices hit technical support level.

“We think that the market finally took note of the sharp plunge in the horizontal gas rig count last week,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The horizontal gas rig count declined by 17 to 601, the lowest level since the first week of March last year. With winter support almost over, we expect prices to remain range-bound over the upcoming shoulder period as the storage buying support will offset some of the speculative bearish pressure.”

Oil prices are driven primarily by market fears of supply disruptions from civil unrest in the Middle East and Northern Africa. However, analysts in the Houston office of Raymond James & Associates Inc. noted West Texas Intermediate increased 1% while North Sea Brent declined nearly 1% on Feb. 7.

“The trifecta of weakness in technology stocks, Moody's downgrade of Greece, and continued fears that high oil prices may jeopardize the fragile economic recovery sent the Standard & Poor’s 500 index down 0.8% yesterday. Energy stocks performed relatively in-line,” Raymond James analysts reported.

“Oil had a mixed day,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “WTI and Brent climbed further in the morning session but were later sold off.” He said, “It is also likely that the recent relatively weaker performance in Brent, compared to WTI, is attributable to profit-taking in Brent, as the aggregated open interest in Brent has been steadily declining this past week.”

Zhang observed, “Despite the strength in Brent’s flat price, the first 2 months of the Brent future contracts have moved into contango in the past 2 days. This reflects a weak physical market, as refining margins have been broadly poor in Europe. The shift also coincides with the timing of index fund roll, which is scheduled for between the 6th to 10th business days of the month for most major long-only indices.”

Raymond James said, “With the civil war between the [Muammar] Gaddafi regime and the rebel forces stuck in a bloody stalemate, the oil market is bracing for many more months of a near-total production shutdown in Libya. Since neither side has a clear upper hand at the moment, the stalemate looks likely to persist.”

They said, “Western intervention could be a game-changer, however. In the past few days, discussion about a potential no-fly zone—which would prevent Gaddafi from using his air force to target rebel-held cities—has been heating up. Several top US senators endorsed the idea on Sunday, the six members of the Gulf Cooperation Council (including Saudi Arabia) followed suit yesterday, and the North Atlantic Treaty Organization ministers will be meeting [Mar. 10-11] to discuss the proposal.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “There is growing speculation about the Gaddafi clan looking for exile guarantees. One thing that does seem to be in the works is the establishment of a no-fly zone. A no-fly zone will translate into a fly-in for all sorts of ‘humanitarian’ troops and other ‘diplomats.’ The UK’s Black Watch battalion and US Marines are already on stand-by (additional Marines were flown in from the US to Crete where they boarded the USS Kearsarge, which has now sailed towards Libya). A no-fly zone also greatly reduces the risk of Gaddafi bombing oil installations in an act of despair.”

He added, “Once the UN starts to run an humanitarian operation in Libya, then the crude oil should find its way back to an export terminal relatively quickly (the UN and some trade finance banks have enough experience in working together on oil-for-food programs). Irrespective of the rumors [about] Gaddafi, if a no-fly zone is imposed we will start to look for the light out of the tunnel for Libya crude oil exports. Speculators have gone massively long into crude oil since the end of January and have been betting not only on chaos in Libya but also in Saudi Arabia and in particular for [the Mar. 11 Internet-organized] ‘Day of Rage’ there.” What happens in Saudi Arabia at the end of this week “will be decisive for speculators in crude oil,” said Jakob.

Pritchard Capital’s Sharma warned, “Concerns that the call for protests in Saudi Arabia on Mar. 11 could quickly turn into widespread unrest are keeping crude propped-up and could push crude even higher when Friday approaches. As the market remains in flux due to the ongoing uncertainties, the net long positions increased by 27% in the week ending Mar. 1, the most in a week since June 2006 when the Commodity Futures Trading Commission started keeping track of the traders’ commitments. 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.”

So far the Organization of Petroleum Exporting Countries has not called a formal meeting to address energy prices and supplies. However, Jakob suggested political issues might prevent such a meeting at this time.

“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 is probably easier for political reasons for OPEC to work out of a formal framework,” he said.

The average price for OPEC’s basket of 12 benchmark crudes was up 61¢ to $112.03/bbl Mar. 7.

Meanwhile, Jakob reiterated, “We continue to keep an eye on Portugal as the yields on that country are coming closer and closer to 8% for the 10 years. That increases further the risk of Portugal seeing the same fate as Greece and Ireland.”

Energy prices
The April contract for benchmark US sweet, light crudes gained $1.02 to $105.44/bbl Mar. 7 on the New York Mercantile Exchange. The May contract increased $1.12 to $106.73/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.02 to $105.44/bbl.

However, heating oil for April delivery declined 2.36¢ to $3.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dropped 4.25¢ to $3/gal.

The April contract for natural gas climbed 11.8¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2¢ to $3.76/MMbtu.

In London, the April IPE contract for North Sea Brent fell 93¢ to $115.04/bbl. Gas oil for March escalated $10.25 to $976.50/tonne.

Jakob said, “Brent has been congesting for the last 4 days as the action has been on narrowing the Brent premium to WTI. With the congestion, Brent is starting to see a flattening in the slope of its 5-day moving average and therefore to lose its moving average momentum. Meanwhile, ICE gas oil is sitting just below the psychological resistance of $1,000/tonne.”

Contact Sam Fletcher at samf@ogjonline.com.