MARKET WATCH: Crude price climbs as production lags

Oil prices continued to climb Apr. 15, with front-month crude poking above $110/bbl in intraday trading in the New York market before closing a little below that price, “as fighting in Libya continued to disrupt oil output,” said analysts in the Houston office of Raymond James & Associates Inc.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 18 -- Oil prices continued to climb Apr. 15, with front-month crude poking above $110/bbl in intraday trading in the New York market before closing a little below that price, “as fighting in Libya continued to disrupt oil output,” said analysts in the Houston office of Raymond James & Associates Inc.

The Libyan conflict got uglier last week “when Moammar Gadhafi’s forces reportedly fired cluster bombs and heavy weapons into the residential areas of the anti-regime town of Misurata,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Crude had otherwise come under pressure despite the signs of a strengthening economic recovery in the US. Prices fell $3.13/bbl or 2.8% week-over-week [in New York].”

The price of the front-month natural gas contract dipped Apr. 15, “but gained 16.3¢ or 4% week-over-week,” Sharma said.

Leon Westgate at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil had a mixed end to the week; however, West Texas Intermediate continued to edge higher and recovered from initial dollar-related weakness….” He said, “A general sense of uncertainty [the morning of Apr. 18] has again seen oil look towards exogenous factors for direction, with a stronger dollar again dragging on prices ahead of the afternoon.”

Raymond James analysts reported prices for crude, natural gas, and the broader equity market were down in early trading Apr. 18 after Saudi Arabia Oil Minister Ali I. Al-Naimi said the global oil market is oversupplied. Saudi production fell by 800,000 bbl in March, “coinciding with a fall in demand from Japan after last month's devastating earthquake,” they said.

Analysts at the Centre for Global Energy Studies (CGES), London, said, “Oil prices [generally] are rising to levels that are beginning to affect demand, yet the world is being told once again that markets remain ‘well-supplied’ with crude and that the upward march of prices does ‘not reflect the realities of supply and demand.’” Members of the Organization of Petroleum Exporting Countries have not replaced oil production lost to the conflict in Libya, leaving a shortage of 1 million b/d last month. “If OPEC will not raise supply to balance the market, demand will have to come down eventually, which will only be achieved by a repeat of the record prices of 2008,” CGES analysts predicted.

They said, “Despite assertions from energy ministers of both oil-producing and oil-consuming countries, as well as some investment banks, that oil prices have been driven upwards by speculation, the CGES believes that this is not the case. While ‘speculative’ long positions may have set new records, the CGES’ index of speculative intensity, which measures the volume of ‘pure’ speculative activity that is not offsetting opposite positions taken by ‘hedgers’, is close to its lowest point since the beginning of 2007.”

CGES analysts noted, “Oil market fundamentals have been tightening since the middle of 2010. Inventories have been declining since the end of the first quarter in 2010, falling at a rate of more than 1.4 million b/d during the second half of the year. Global stock cover was below 70 days at the start of second quarter in 2011, a level last seen at the same point in 2008 and nearly 5 days below the same time last year.”

They emphasized, “Oil demand cannot continue to grow over time without the supply to satisfy it. If OPEC will not raise output, then demand growth will eventually have to fall, and that will only be brought about by oil prices rising to levels high enough to begin destroying demand—exactly as happened in 2008. While the balance of fundamental factors driving oil prices upwards may differ from those in 2008, their net effect may be horribly similar.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “Oil prices were driven by the battle of two financial titans over the past few days. While Goldman Sachs asked its clients to get out of commodity markets, Barclays Capital remained bullish and criticized those who are just trying to raise the attention of the ‘petroleum paparazzi.’”

They noted, “Physical markets in Europe remained strong. [North Sea] Forties [crude] is still fetching the highest premium against dated Brent since August 2010. The West African market has weakened considerably with the Forcados premium to dated plunging…. However, the reason behind the West African malaise is a wide Brent-Dubai spread, which is limiting the flow of Nigerian light, sweet grades to Asia.”

KBC analysts observed, “Prices in Europe now have to come off a little bit more to facilitate the flow of oil to the Far East. European refiners are bearing the brunt of high prices with poor margins forcing them to cut refinery utilization. Saudi Arabia has tried to calm down the market, but its crude cannot replace Libyan barrels because of its higher sulfur content. This is one of the main reasons behind the kingdom’s decision to tighten the taps, as recent reports suggest, it has only been able to sell a few cargoes of its new crude especially blended for Europe. KBC Energy Economics sees prices dropping to levels around $100/bbl from present levels but only after there is more influx of light sweet crude into this region, which seems currently impossible due to the lack of Libyan supply.”

Energy prices
The May contract for benchmark US light, sweet crudes climbed $1.55 to $109.66/bbl Apr. 15 on the New York Mercantile Exchange. The June contract rose $1.52 to $110.22/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.55 to $109.66/bbl.

Heating oil for May delivery increased 3.52¢ to $3.22/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 5.45¢ to $3.29/gal.

The May natural gas contract dipped 0.8¢ to $4.20/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 6.5¢, also to $4.20/MMbtu.

In London, the new front-month June IPE contract for North Sea Brent crude was up $1.45 to $123.45/bbl. Gas oil for May continued climbing by $12 to $1,024.50/tonne.

The average price for OPEC’s basket of 12 reference crudes slipped 4¢ to $117.86/bbl. So far this year, OPEC’s basket of crudes has averaged $103.63/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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