MARKET WATCH: Oil rallies on news of OPEC's indecision

Energy prices climbed higher June 8 with crude again closing above $100/bbl in the New York market when—for the first time in memory—ministers of the Organization of Petroleum Exporting Countries failed to reach consensus on production during an acrimonious meeting in Vienna.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 9 -- Energy prices climbed higher June 8 with crude again closing above $100/bbl in the New York market when—for the first time in memory—ministers of the Organization of Petroleum Exporting Countries failed to reach consensus on production during an acrimonious meeting in Vienna.

“Oil rallied yesterday on the news that OPEC could not agree to a quota increase, with West Texas Intermediate outperforming Brent on a sizable crude inventory draw in the US,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Product cracks weakened on a larger-than-expected product inventory build in the US. WTI’s term structure recovered somewhat on a 1 million bbl crude draw at Cushing, Okla.”

Natural gas ended the day slightly higher as hot temperatures continued to support prices, said analysts in the Houston office of Raymond James & Associates Inc.

OPEC’s current production quotas have been in place since September 2008. Saudi Arabia, Kuwait, Qatar, and the UAE backed a proposal to increase the quota by 1.5 million b/d at yesterday’s meeting, while Algeria, Libya, Angola, Ecuador, Venezuela, Iraq, and Iran opposed any production increase.

Zhang said, “The quota itself is largely symbolic, as OPEC members collectively exceeded the current quota by 2.6 million b/d in May, excluding Libya and Iraq. More importantly, as of the production levels in May, the four member countries who backed a quota increase collectively hold 3 million b/d out the total 4.5 million b/d OPEC spare capacity. Therefore, as long as Saudi Arabia and its fellow Persian Gulf neighbors keep up oil supply, the OPEC decision of yesterday should have little impact on the oil market balance in the near term.”

Olivier Jakob at Petromatrix, Zug, Switzerland—a longtime observer of OPEC sessions—said, “There were meetings where OPEC could not come to an agreement on a change of policy, meetings where the wishes of Saudi Arabia where not met, but we don’t recall a meeting that just split-up, without even an agreement on a communique and followed by all sorts of name-calling” as occurred June 8.

He said, “Iran played hardball and tried to move the decision to a month or two from now at an emergency meeting to be held in Tehran.” Shortly before yesterday’s meeting, Iran’s President Mahmoud Ahmadinejad dismissed Oil Minister Massoud Mirkazemi, appointing himself temporary head of that ministry until his move was declared illegal by a vote of parliament. At the time of his dismissal, Mirkazemi also filled the rotating position as OPEC president, a role Ahmadinejad planned to assume until voted down.

“With Iran blocking everything and trying to delay the OPEC decision to an emergency meeting,” Jakob said, “instead of Ahmadinejad going to OPEC in Vienna, it would be OPEC coming to Ahmadinejad in Tehran. Saudi Arabia and the other Gulf Cooperation Council (GCC) countries, however, did not seem to like that proposal very much, and everybody parted their own way in a very unusual manner.”

He said, “Saudi Arabia and the GCC countries gave clear signals after the historic failed meeting that they would go on with their plan to increase production. One thing that was clear from the post-meeting declarations is that the proposed increased of quota was not purely an exercise of legitimizing the current production levels but of increasing the real supply to an OPEC total of 30.3 million b/d, which would have prevented a stock draw in the third quarter (the International Energy Agency has the call-on-OPEC in the third quarter at 30.1 million b/d). The increase would come mainly from Saudi Arabia and matches the Saudi production level of about 9.6 million b/d, which has been indicated by various sources.

Saudi Arabia now “has no choice” but to maintain its increased production, said Jakob. “If it does not, then it means that the new powerhouse in OPEC is Iran, and we do not think that Saudi Arabia or more broadly the GCC countries are ready to accept that. The GCC countries can withstand much lower prices than Iran, hence a power struggle for the leadership of OPEC is not necessarily price-supportive,” he said.

“In terms of real supply to the market, our read of the meeting breakdown is that the GCC countries will go ahead with the supply increase and bring total OPEC supplies very close to the target of 30.3 million b/d,” Jakob predicted. “As far as the argument that an increase of supplies lowers the spare capacity of OPEC (or of Saudi Arabia), while we recognize that it is a good marketing line (‘no increase of supplies is bullish, an increase of supplies is bullish too as it reduces spare capacity’) we are also of the opinion that spare capacity is not fixed in time and that the West will have taken [Libya’s Moammar] Gadhafi out before the end of the year (the current status cannot drag into the US or the French election year, and even the Chinese are now welcoming the rebels), which will de facto contribute to an increase of spare capacity in 2012.”

US inventories
The Energy Information Administration reported June 9 the injection of 80 bcf of natural gas into US underground storage during the week ended June 3, above the Wall Street consensus of 78 bcf. That brought working gas in storage to nearly 2.2 tcf. That’s 255 bcf less than in the comparable period last year and 58 bcf below the 5-year average.

EIA earlier reported commercial inventories of US benchmark crudes fell by 4.8 million bbl to 369 million bbl last week, exceeding the Wall Street consensus for 1.4 million bbl decline. Gasoline stocks gained 2.2 million bbl to 214.5 million bbl in the same period, double the market’s expectations of a 1.1 million bbl increase. Inventories of both finished gasoline and blending components increased last week. Distillate fuel inventories were up 800,000 bbl to 140.9 million bbl, exceeding traders’ outlook for a 100,000 bbl increase (OGJ Online, June 8, 2011).

Meanwhile, Jakob said, “Brent has been trying to break higher from its recent trading range, but it is not followed by gasoline and as a result the RBOB crack to Brent (or to Light Louisiana Sweet) continues to slide lower and lower. Cutting refinery runs is not politically correct at current pump prices; hence at current crack values and levels of gasoline in stocks we think that we are getting closer to the point where US gulf refineries should start experiencing increased technical problems with electrical switches.”

He said, “The European naphtha crack has fallen to the lowest levels since the industrial breakdown of 2008, and that will not be helping the gasoline crack.”

Energy prices
The July contract for benchmark US sweet, light crudes traded at $98.02-101.89/bbl June 8 before closing at $100.74/bbl, up $1.65 for the day, on the New York Mercantile Exchange. The August contract climbed $1.60 to $101.29/bbl. On the US spot market, WTI at Cushing was up $1.65 to $100.74/bbl.

Heating oil for July delivery rose 1.67¢ to $3.09/gal on NYMEX. RBOB for the same month dipped 1.32¢ to $2.98/gal.

The July natural gas contract increased 1.6¢ to $4.85/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 4.5¢ to $4.86/MMbtu.

In London, the July IPE contract for North Sea Brent crude was up $1.07 to $117.85/bbl. Gas oil for June climbed $16 to $970.50/tonne.

The average price for OPEC’s basket of 12 reference crudes increased $1.27 to $111.93/bbl.

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