MARKET WATCH: Disappointing economic data reduced oil prices

The post-holiday rally ended as oil prices declined Dec. 1 on disappointing purchasing managers’ index numbers for both the Euro-zone and China although crude remained above $100/bbl in the New York market.

The post-holiday rally ended as oil prices declined Dec. 1 on disappointing purchasing managers’ index numbers for both the Euro-zone and China although crude remained above $100/bbl in the New York market.

Natural gas, however, escalated 3% in that market following the first withdrawal from US underground storage. The Energy Information Administration reported withdrawal of 1 bcf from US underground storage during the week ended Nov. 25, counter to market expectations of a 10 bcf injection. Working gas in storage was reduced to 3.851 tcf. That’s still 41 bcf more than the amount in storage a year ago and 261 bcf above the 5-year average (OGJ Online, Dec. 1, 2011).

Despite weak financial data, the stock market generally maintained much of the gains from the Nov. 30 session. Stocks and oil prices were up in early trading Dec. 2 even before the US Department of Labor reported US unemployment dipped to 8.6% in November from 9% in October, and German Chancellor Angela Merkel demanded tougher fiscal discipline among European Union members.

Merkel and French President Nicolas Sarkozy are to discuss means of restoring confidence in the European economy on Dec. 5 ahead of a Dec. 9 summit of EU leaders.

US unemployment fell last month to its lowest level since March 2009 via a combination of 120,000 new jobs and 315,000 people no longer counted as unemployed because they’ve given up looking for jobs and dropped out of the work force. Some 13.3 million US residents remain unemployed.

There was a net gain of 140,000 jobs in the private sector last month, while 20,000 government jobs were terminated, primarily state and local. Some 500,000 government jobs have been eliminated this year.

Moreover, most of the jobs added in November were attributed to holiday hiring by retailers, restaurants, and bars. DOL revised its September-October employment figures to include 72,000 additional jobs. The government has issued higher revisions for four consecutive months. Yet figures indicate the US has regained only 2.5 million of the 8.7 million jobs lost since February 2008.

In other news, after 535 days without a prime minister or cabinet—“a record far surpassing that of Iraq”—Belgium is about to form a new government, said analysts in the Houston office of Raymond James & Associates Inc. The recent downgrade in that country’s credit rating was the determining factor, they said.

Citing reports from Reuters news service, Raymond James analysts noted the European Union and other members of the international community are increasing sanctions against Syria. “In the latest development, the EU has blacklisted several state-owned enterprises in the oil industry that are responsible for trade and exploration,” they said. An EU agreement in September to ban imports of Syrian crude was fully implemented by mid-November, and the Royal Dutch Shell PLC said it plans to pull out of Syria. “The EU has become more aggressive in its sanctions against Syria, as its international counterparts, including the Arab League, have also shown increased support for sanctions,” Raymond James said.

That does not, however, signal similar meaningful sanctions against Iran yet. “The EU did not impose an oil ban yesterday on Iranian crude oil imports and as we warned since the beginning, the weak link for an embargo is the dependency of southern Europe (and especially of Greece) on Iranian crude oil,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “France and the UK will continue to push for an embargo, and it is very likely that there will be [a limited] one by the end of the first quarter.” But a continental ban on Iranian crude is unlikely, he said.

The rescue effort by the US Federal Reserve and other central banks early this week “provides only short-term relief, by no means rooting out the Euro-zone debt crisis,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Tension in Iran remained very high, which has kept oil price volatility at an elevated level, and the market bidding tail risks. We expect the oil price to remain heated in the near future as supply shortfalls continue. That said, some weakness is expected next week due to very poor refining margins and with the optimism over the US fading.”

Markets and refiners

Distillates “underperformed again” in Dec. 1 trading “following the hefty inventory build in the US and growing inventories in Europe, while gasoline has shown signs of recovering from its recent slump,” Zhang said. “Globally, refining margins are under tremendous pressure, which is likely to delay the run increase after the autumn maintenance season.”

In Europe, total oil product inventories in Amsterdam, Rotterdam, and Antwerp (ARA) rose by 79,000 tonnes in the latest week. “The latest inventory report has kept the overall picture broadly unchanged, with gasoline staying in its seasonal build trend, and middle-distillates and total ARA product stocks significantly below the seasonal levels of the previous 2 years. The inventory picture should keep European refining margins from further substantial falls,” said Zhang.

In Singapore, total oil product inventories rose 1.2 million bbl last week. “The middle-distillate market in Singapore remains tight, but the rapid stock decline appears to have halted. In general, the market in the East is in slightly better shape than Europe, which has attracted some European crude to the East.”

Jakob reported, “Lack of domestic demand and poor refining margins continue to take their toll on the US East Coast refineries. As we expected, under the current processing economics Sunoco Inc. will not wait July 2012 to terminally shut down their refineries. Yesterday they announced that they were pulling the plug on the Markus Hook refinery and will for now continue to run the Philadelphia refinery (however if the current market conditions continue we should also expect there a shut-down before July).”

With ConocoPhillips’s Trainer and Sunoco’s Marcus Hook refineries shutting down and Sunoco’s Philadelphia refinery due to close in 2012, Jakob said, “It is now being confirmed that we will lose about 700,000 b/d of light, sweet crude demand on the US East Coast in the summer of 2012 compared with the summer of 2011 while on the supply side Libyan crude oil production will have almost reached prewar levels.”

He said, “We continue to expect that Libya will be producing very close to 1 million b/d in early January. While some of the Angola crude oil that was being taken by Conoco and Sunoco can find a home in China, it will be a greater challenge for crude oil from Nigeria. The supply and demand picture for light, sweet crude oil in the first half of 2012 will be structurally different than in the first half of 2011, and Brent is already having some difficulties in finding follow-through buying on attempts at converging back to the recent levels of backwardation.”

Problems for US refiners don’t stop on the East Coast, Jakob said. “The US currently runs 3.3 million b/d of crude oil to produce distillates for exports. The US Gulf Coast refining margins are also under pressure and are at the mercy of a slowdown in European demand. If there was a spike in European diesel premiums in October, they have now fallen to the lowest level since the second quarter of 2010 and are at levels comparable to mid-2009. The backwardation is still not providing demand for storage plays, but diesel is trying to move back towards storage economics through the lower prompt premiums.”

In 2009, Gulf Coast refineries survived by pushing distillates into European fixed and floating storage. If current demand continues to slow, Jakob said, “They will likely have to do that or reduce refinery runs further. Given the correction in the physical premiums we find the ICE gasoil cracks on the rich side.

Natural gas

US gas supply continues to be boosted by the strong growth in shale gas production and drilling for liquids. However, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Demand is still being hurt by the slowdown in US gross domestic product and industrial production. We believe that the longer-term fundamental picture in US natural gas favors firmer prices. Tighter Environmental Protection Agency rules on coal use, innovation in promoting natural gas demand, and the potential for LNG exports all point to an eventual upward move in gas prices, but the onset of these developments has been delayed. In the medium term, we believe that US gas is supported by coal competition at about $4/MMbtu.”

He said, “Proposed EPA regulations on power plant emissions could raise this floor. Near term, however, the gas markets face difficulty. Start-of-winter storage appears to have peaked at a relatively high level near 3.858 tcf, with supply-demand balances pointing to an end-of-winter bottom near a record high 1.9 tcf. This will tend to stifle rallies, even if La Nina conditions lead to colder December and January temperatures. Consequently, we have reduced our natural gas price forecast to $4.25/MMbtu for 2012 from a prior estimate of $5/MMbtu. We have also cut our forecasts for 2013-15.”

In the European gas, said Sieminski, “We analyze the composition of the demand decline seen in 2011 and find that roughly half of the decline is weather-related, and half the result of an underlying broad-based decline across all demand sectors.”

Energy prices

The January contract for benchmark US light, sweet crudes retreated 16¢ to $100.20/bbl Dec. 1 on the New York Mercantile Exchange. The February contract declined 13¢ to $100.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 16¢ to $100.20/bbl.

The new front-month January contract for heating oil dropped 5.56¢ to $2.97/gal on NYMEX. Reformulated stock for oxygenate blending for the same month dipped 0.05¢ but closed essentially unchanged at a rounded $2.56/gal.

The January natural gas contract increased 9.8¢ to $3.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.6¢ to $3.47/MMbtu.

In London, the January IPE contract for North Sea Brent was down $1.53 to $108.99/bbl. Gas oil for December fell $19.25 to $946/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 97¢ to $109.41/bbl.

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