MARKET WATCH: Crude, natural gas post major gains in NY market

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 18 -- The price of crude jumped 4% Mar. 17 in the biggest gain in 3 weeks in the New York market as a United Nations discussion of a no-fly zone over Libya and arrests of opposition leaders in Bahrain shifted traders’ attention back to the troubled Middle East and North Africa (MENA).

“Natural gas rose more than 5% to its highest level in 5 weeks after the Energy Information Administration reported a much larger than expected withdrawal of 56 bcf” from US underground storage in the week ended Mar. 11, said analysts in the Houston office of Raymond James & Associates Inc.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Event risk is building in the oil market as Gulf Cooperation Council troops have moved into Bahrain and the UN approves a no-fly zone across Libya. This is occurring at a time where spare capacity in Saudi Arabia is falling rapidly. Liquidity injections in Japan should ensure the negative impact on gross domestic product will be relatively modest. We therefore view events as bullish crude oil.”

No-fly zone established
Overnight, the UN Security Council approved a resolution “that goes significantly beyond a no-fly zone in Libya,” authorizing “all necessary measures” including airstrikes but not a ground invasion if Moammar Gadhafi's forces attack the rebel capital of Benghazi or otherwise threaten civilians.

The US, UK, and France voted for the resolution while Russia and China abstained. Britain and France immediately said they would send aircraft to enforce the no-fly zone while Italy offered the use of its bases. US officials have not yet said what they plan to do.

The Arab League last week endorsed a no-fly zone, and members of the North Atlantic Treaty Organization were in an emergency meeting.

On Mar. 18, Libya declared an immediate cease-fire in hopes of forestalling international action against Gadhafi, but a rebel spokesman reported attacks by government forces continued well after that announcement.

Olivier Jakob at Petromatrix, Zug, Switzerland, anticipates “a few air strikes today” just to “pass the message” to Gadhafi. “Their intensity and targets will determine if it is a real game changer as Gadhafi still has hardware superiority with his ground forces,” he said. However, he cautioned, “Action today is not fully certain as not everybody seems as hurried as the French.”

Jakob said, “All scenarios are possible at this stage. Some states from the [Persian] Gulf will have the particularity of participating militarily both in the support of the rebels in Libya and of the government in Bahrain. Today being Friday there will also be the regular risk of after-prayers protests in the Middle East.”

The prospect of foreign military intervention just as the Libyan rebels were on the verge of defeat should create “a firm perimeter” around the rebel stronghold in Benghazi. However, Raymond James analysts said, “By prolonging the civil war—perhaps indefinitely—the UN resolution means that Libyan oil supply disruptions will also last longer.”

Moreover, they said, “The likelihood of military confrontation between the West and Libya places all the western oil companies in Libya in an extremely precarious, complicated situation. Gadhafi may seek to punish these companies for their governments' actions, for example by expropriating assets. However, we believe it is unlikely that he will try to physically destroy oil fields (as Iraqi forces did in Kuwait in 1991), because that would deprive his own government of much-needed revenue, especially after the recent asset freezes.”

Italy's Eni SPA, the largest international oil company operating in Libya, has already halted production in that country. US producers in Libya are Marathon Oil Corp., Hess Corp., ConocoPhillips, and Occidental Petroleum Corp.

Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, noted, “The situations in Libya and Bahrain have intensified significantly over the past week. The apparent move into a military endgame in Libya…is likely to represent the most immediate source of upside price risk for oil. However, in the longer term, in our view, the passage of events in Bahrain may prove to be a more profound development.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Continued unrest in the Middle East will be a driver for oil prices in the near-team, outweighing the concerns that Japanese demand for crude could be curtailed for an extended period of time as well as China’s central bank moving to cool economic growth.”

In Japan, the situation is still fluid. Jakob reported, “Power lines are being reconnected, but is all the equipment still functioning? While we need to hope that control is regained, the evacuation of the island continues, and Daiichi will continue to provide headlines. The Japanese have raised the alarm level from 4 to 5 so it is too early to say that all is improving. We thought that the BP PLC Deepwater Horizon accident would be quickly resolved.”

Horsnell said, “The impact on the oil market of the sequence of events started by the Japanese earthquake consists of the balance between a significant but short-term demand loss, and the longer-term ramifications for fossil fuel usage arising from less incremental nuclear power generation.”

Based on current assessments, Sieminski said, “The net impact of the devastating earthquake and tsunami in Japan may ultimately prove to be supportive for the global oil balance from both a demand as well as a supply perspective. Barring a more negative view on Japan's economic growth, we believe higher demand for oil for power generation and potentially sustained refinery disruptions will tighten up the global oil balance.”

Currency ‘twist’
Jakob also noted “an additional twist overnight” as the G7 [industrialized nations: Canada, France, Germany, Italy, Japan, UK, and US] decided on coordinated intervention to weaken the Japanese Yen. “While intervention from the Bank of Japan was expected, a coordinated intervention was a surprise and was the first in many years,” he said. “The volatility in currencies [on Mar. 16] was not helped by some market makers that decided to pull the plug and not to make a market anymore (a bit similar to what happened last May during the ‘flash crash’). Meanwhile, China is again increasing the bank’s reserve requirements.”

At the current oil price level, Jakob said, “The volatility in currencies will become a stronger factor for the test of demand destruction levels. For now the latest indications about oil demand in key European countries are mixed. Gasoline sales continue to structurally decline in France and Italy, but diesel sales were still higher than a year ago and remain particularly strong in Germany.” However, he reported, “The German update for February has suddenly been removed from the official site; hence we cannot exclude at this stage a revision.”

Energy prices
The April contract for benchmark US light, sweet crudes came within 1¢ of the $102/bbl level Mar. 17 on the New York Mercantile Exchange before closing at $101.42/bbl, up $3.44 for the day. The May contract gained the same amount, $3.44, to finish at $102.39/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., also was up $3.44 to match the front-month futures price of $101.42/bbl.

Heating oil for April delivery climbed 6.77¢ to $3.06/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month escalated 10.69¢ to $2.95/gal.

The April natural gas contract jumped 22¢ to $4.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.2¢ to $3.85/MMbtu. Sharma said, “Despite spring weather setting in, it looks like in the near term natural gas should continue getting support from stronger crude futures and increased imports of liquefied natural gas by Japan.”

In London, the new front-month May IPE contract for North Sea Brent crude traded above $115/bbl before closing at $14.90/bbl, up $4.30 for the day. Gas oil for April gained $15.25 to $974.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $2.28 to $108.08/bbl.

Contact Sam Fletcher at samf@ogjonline.com.