MARKET WATCH: Crude price explores new high; natural gas slumps

Front-month crude continued climbing to a new 30-month high Apr. 7 in the New York market, while natural gas fell for the fifth consecutive session after the government announced a smaller-than-expected withdrawal from US underground storage.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 8 -- Front-month crude continued climbing to a new 30-month high Apr. 7 in the New York market, while natural gas fell for the fifth consecutive session after the government announced a smaller-than-expected withdrawal from US underground storage.

The Energy Information Administration reported the withdrawal of 45 bcf of natural gas in the week ended Apr. 1, below the Wall Street consensus for a 51 bcf pull. That reduced working gas in storage to 1.6 tcf, down 86 bcf from a year ago at this time but 10 bcf above the 5-year average (OGJ Online, Apr. 7, 2011).

“Oil boasted 2½-year highs as turmoil in Libya and the Middle East continues to overshadow demand concerns,” said analysts in the Houston office of Raymond James & Associates Inc. However, they said, “Energy stocks couldn't take advantage of soaring oil prices, finishing the day flat, performing in-line with the broader market,” which was adversely affected by another major earthquake in Japan. Stocks and oil prices were higher in early trading Apr. 8, while the price of gas was still declining.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “We believe Libya will be out of the oil markets for the medium term. Furthermore, we view underlying oil supply and demand fundamentals as tight, with inventories trending lower and spare capacity being squeezed. This portends further upside in high oil prices in our view.”

Oil prices rose in afternoon trading Apr. 7 after the European Central Bank announced a 0.25% hike in interest rates. “The widely expected hike is unlikely to derail the upward trend in the oil price, with the US Federal Reserve System still firmly on the path of accommodative monetary policy,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Product cracks generally weakened as they failed to catch up with crude’s rally.”

The ECB rate increase was generally expected. In addition, the ECB, “while not committing yet to it, is leaving open the possibility of further increases in rates,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “This is providing some support to the euro-dollar [exchange rate] and by default to commodities. US gasoline prices at the pump continue to climb and should average $3.80/gal next week.”

Jakob said, “Yesterday the Dow Jones-UBS Commodity Index sent a notice that ‘Brent crude oil will be specifically considered for the index beginning in 2012.’ The DJ-UBS Commodity Index is the second largest commodity index (after the S&P GSCI) and is for now only invested in West Texas Intermediate futures. With the increasing liquidity in Brent futures, we can also expect the S&P GSCI [under Standard & Poor’s and Goldman Sachs] to increase further its crude allocation to Brent; hence the reweighing of those two indices from WTI to Brent should put some significant pressure on the first quarter values for WTI-Brent at the start of 2012, with some pre-positioning likely before the actual roll-date.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts also noted the ICE Brent crude contract in Britain appears about to topple US benchmark light crudes on the New York Mercantile Exchange as the most traded crude futures contract.

“Since the start of the uprising in Libya on Feb. 15, speculative length in NYMEX crude futures has risen by 60% to 262,000 contracts at Mar. 29,” said KCB analysts. “Even the laggardly NYMEX crude futures contract has since risen…so net speculative length is likely to have hit a new all-time high.”

They charged, “The flood of money into oil futures and other asset classes has been encouraged by ultra loose monetary policies. Net investment into US commodity indices rose above $300 billion for the first time in February, with an increase of some 15-20% over the preceding 3 months. The strong upward trend is likely to continue through June with the US Federal Reserve expected to complete its $600 billion stimulus program under the second round of quantitative easing. Only about one third of the implied geopolitical risk premium in current prices is discounted by December 2012 when the ICE Brent contract is priced at $114.49/bbl. This would imply a protracted period of high oil prices for which there is no precedent.”

High prices destroy demand
KBC analysts said, “Not only will Europe’s ongoing debt problems and the European Central Bank’s decision to hike interest rates for the first time since 2008 understandably dampen European consumers’ appetite for oil, but also the persistently inflated level of oil prices will increasingly deter all but the most robust consumption trends.”

They noted, “The price of front-month Brent crude settled close to $115/bbl on most trading days in March except for a short-lived slump to below $110/bbl in the aftermath of the massive earthquake in Japan. However, over the past week, the contract has moved up sharply…. More than $7/bbl has been added in just five trading sessions and, more importantly, resistance has been broken at $120/bbl.”

The primary driver of higher oil prices “is a growing perception in the market that the conflict in Libya might not end any time soon.” KCB analysts also said, “Oil prices have been driven higher by rising geopolitical concerns with unrest in Bahrain, Yemen, and Syria, together with upcoming elections in Nigeria, Africa’s biggest oil exporter.”

Energy prices
The May contract for benchmark US light, sweet crudes gained $1.47 to $110.30/bbl Apr. 7 on NYMEX. The June contract increased $1.40 to $110.88/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.47 to $110.30/bbl. Heating oil for May delivery advanced 1.48¢ to $3.21/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped 0.64¢ to $3.19/gal.

The May natural gas contract fell 8.9¢ to $4.06/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7.5¢ to $4.12/MMbtu.

In London, the May IPE contract for North Sea Brent crude was up 37¢ to $122.67/bbl. Gas oil for April lost $1 to $1,024.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes inched up 3¢ to $117.65/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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