MARKET WATCH: Libyan peace proposal lowers oil prices

Oil prices tumbled Apr. 11 with both West Texas Intermediate and North Sea Brent down 2.4% on the prospect that peace might breakout in Libya after the Africa Union (AU) announced dictator Moammar Gadhafi accepted its proposed “peace roadmap.”

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 12 -- Oil prices tumbled Apr. 11 with both West Texas Intermediate and North Sea Brent down 2.4% on the prospect that peace might breakout in Libya after the Africa Union (AU) announced dictator Moammar Gadhafi accepted its proposed “peace roadmap.”

“If the peace deal brings an end to the military conflict in Libya, it can alleviate the supply disruption from Libya and, to some extent, fears for further significant unrest in the Middle East-North Africa region,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group (OGJ Online, Apr. 11, 2011).

However, the rebels later rejected the AU peace plan. Olivier Jakob at Petromatrix, Zug, Switzerland, said, “One of the main problems in that conflict is that the ‘rebels’ are a loose and ill-defined organization, and they will have goals probably above what they can achieve. The Western alliance has been betting on a putsch from within in Tripoli, but for now that has failed to materialize.”

Zhang said Apr. 12, “While the market never expects a quick ending of the Libya conflicts, the latest development highlights the difficulty for a peace deal in the country due to differences on the proposed future of Gadhafi.”

In Houston, analysts at Raymond James & Associates Inc. said Libyan rebels “might be looking at Ivory Coast as a possible template” after that country’s former president, Laurent Gbagbo, was arrested Apr. 11, essentially ending that civil war. If Libyan rebels “were to capture Gadhafi—if necessary, with international help—the war would almost instantly come to an end, as Gadhafi’s forces dissipate,” they said.

Oil products largely tracked crude’s retreat in energy markets, with reformulated blend stock for oxygenate blending (RBOB) largely tracking WTI. “The ICE gas oil April-May spread finally gave back its backwardated structure as the April contract approaches expiry today. The term structure for WTI and Brent also weakened,” said Zhang.

Raymond James analysts reported, “Natural gas briefly showed off a $3 handle in pre-market activity yesterday morning but eventually closed the day up 1.7% as temperatures are expected to be below normal over the next 10 days.”

High prices reduce demand
Oil prices also were undercut when the International Monetary Fund announced lower growth forecasts for global demand, citing higher energy prices as a “key downside risk” for global growth.

The Goldman Sachs Group Inc. called Apr. 11 for taking profits on crude oil length on the fear of demand destruction at current price levels, Jakob noted. “Goldman Sachs sees the risk on crude oil becoming symmetric with the demand destruction risk offsetting what is left of a geopolitical premium,” he said.

With Goldman Sachs “starting to mention” demand destruction, “it will be interesting to see how the other financial institutions also adapt their view on the oil market as there is usually some convergence of opinion on Wall Street,” said Jakob. “It is also true that volume has not been great over the last 2 weeks and that the market might need to fall to lower levels before hedgers come back to generate more volume and commissions for swap dealers. We have been warning that the focus will increasingly shift towards the demand side for confirmation of demand destruction, and the Goldman Sachs reversal in terms of market impact is as good as any confirmation through the fundamental data.”

Oil had a strong first quarter, “driven by geopolitical tensions, loosening of monetary policy, and a strong US economic recovery,” Zhang said. So far this year, front-month WTI and Brent gained more than 20% and 30%, respectively. Oil products increased on the back of refinery capacity losses caused by the catastrophic earthquake in Japan. Front-month ICE gas oil soared by 36% year-to-date, while RBOB surged by 31%.

“On the back of this rapid increase in prices, consumers have been squeezed,” said Zhang. “Consequently, we see signs that oil product demand has been hurt by high oil prices. The implied demand in the US for gasoline and distillates has shown signs of decline in recent weeks. US gasoline demand hit a seasonal low last week, after its strong recovery in March back up to the 5-year average. It's worth noting the very low gasoline demand level in February was partly due to reduced mileage caused by stormy weather.”

He said, “While the market is inclined to focus on demand destruction in gasoline, the demand for distillates also seems to have been hit.”

In its latest update, the International Energy Agency in Paris left global oil demand unchanged for 2011 but with a slight revision lower demand among non-members of the Organization for Economic Cooperation and Development (OECD) offsetting an increase in Japanese demand for power generation. Crude supplies from producers outside the Organization of Petroleum Exporting Countries increased by 200,000 b/d. The 2011 call on OPEC was reduced slightly to 29.8 million b/d, compared with estimated OPEC production in March of 29.2 million b/d.

Meanwhile, Jakob said, “In Japan, the situation being stable means that it is not improving and as radiation continues to accumulate, the ‘crisis level’ has been pushed up to the maximum (i.e. Chernobyl scale). Expectations of a strong post quake recovery have been priced-in for Japan, but the nuclear accident is still a risk for that recovery.”

Energy prices
The May contract for benchmark US sweet, light crudes fell $2.87 to $109.92/bbl Apr. 11 on the New York Mercantile Exchange. The June contract dropped $2.80 to $110.57/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.87 to $109.92/bbl, in lock step with the front-month futures contract.

Heating oil for May delivery lost 6.72¢ to $3.25/gal on NYMEX. RBOB for the same month declined 6.02¢ to $3.20/gal.

The May natural gas contract climbed 6.7¢ to $4.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 4¢ to $4.06/MMbtu.

In London, the May IPE contract for North Sea Brent crude dropped $2.67 to $123.98/bbl. Gas oil for April lost $2.50 to $1,050.50/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 29¢ to $120.30/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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