MARKET WATCH: Crude temporarily tops $100/bbl in New York

The new front-month April contract for benchmark US light, sweet crudes hit $100/bbl in midday trading Feb. 23 in the New York market before closing just above $98/bbl.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 24 -- The new front-month April contract for benchmark US light, sweet crudes hit $100/bbl in midday trading Feb. 23 in the New York market before closing just above $98/bbl. North Sea Brent in London climbed above $112/bbl in intraday trade on the markets’ fears that civil uprisings in the Middle East and North Africa (MENA) may further disrupt crude supplies.

“News that Saudi Arabia and other [members of] the Organization of Petroleum Exporting Countries were willing to put more oil into the market muted gains, leaving West Texas Intermediate up 2.8%” in the New York Mercantile Exchange, said analysts in the Houston office of Raymond James & Associates Inc. “Brent rose 5.5% to maintain is premium over [WTI]. Energy stocks welcomed the strength in commodities with open arms while the broader market pulled back.” SIG Oil Exploration & Production Index (EPX) was up 3.6%, while the Oil Service Index (OSX) inched up 0.8%. The Dow Jones Industrial Average was down 0.8% and Standard & Poor's 500 Index dipped 0.6%.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Earlier some reports even suggested that almost half of Libyan production might have come off line as the country slipped deeper into turmoil.” Some Libyan production has been shut-in as international companies removed personnel from that country (OGJ Online, Feb. 23, 2011).

Libya supplies about 1.55 million b/d of crude, primarily to Europe. “Although Saudi Arabia has reiterated its commitment of making up for any shortfall, these supply disruptions could corner a big chunk of the Saudi spare capacity of almost 4 million bbl; and the spread of the unrest in the other parts of the Middle East would push the price even higher,” said Sharma. “Although Saudi Arabia’s King Abdullah continues to enjoy a high level of respect in the country, the contagion in the Middle East has reached the Saudi borders in Bahrain and is making the market nervous. On the flip-side, this current crisis and the resulting uncertainties could expedite the permitting process to develop domestic resources in the Gulf of Mexico.”

He added, “The turmoil in the Middle East is once again highlighting the risk and uncertainties of dependence on foreign oil, which is more of a global commodity than natural gas, and we expect that the natural gas lobby would gain more traction in Washington as a result. However more immediately, following the natural gas market lately is like watching paint dry despite the projections of colder-than-normal temperatures next week, as the near-term oversupply concerns continue to dominate the sentiment.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “There are only two ways to answer any continuous supply shortfall from Libya: more supply from countries that have some spare capacity (Saudi Arabia but with some quality issue) or lower demand.”

Jakob noted, “Saudi Arabia had said that they would increase production when a supply disruption starts to develop. The supply disruption is occurring; Saudi Arabia is for now staying silent, hence the market has to price the second solver which is lower demand, and lower demand comes through price demand destruction. The price surge of 2008 was quite effective for demand destruction, but the process can be quite harmful and long lasting. Forecasts for oil to reach $200/bbl are starting to surface and if oil can go ballistic on any further fire in the Middle East, the aftermath will probably be dramatic for the world economy.”

He warned, “At current prices Iran will start to feel that it has more global leverage and we cannot exclude that they start to have a more general aggressive attitude. In the current context it is interesting to note that three Grad rockets were fired yesterday from Gaza to the Israeli city of Be’er Shiva, the first time this has happened since the Gaza War. It will probably not take long before Iran plans some additional war games in the Strait of Hormuz.”

Brent is again widening its premium over WTI, “but European refining margins will start to come under increased pressure,” Jakob said. “On a euro/bbl basis, Brent is currently trading at levels comparable to $135/bbl in 2008. If Saudi Arabia plays the card that consumer nations need to draw stocks before OPEC increases supply, then it will further lose the control of flat price as the backwardation that will come with such a scenario will attract even more funds into oil. Hence, as long as the military does not overthrow [Moammar Gadhafi] and OPEC does not increase supply, the markets will continue to price the demand destruction solver through higher prices.”

US inventories
The Energy Information Administration said Feb. 24 commercial inventories of benchmark US crude increased 800,000 bbl to 346.7 million bbl in the week ended Feb. 18. The Wall Street consensus was for a 1.1 million bbl build. Gasoline stocks fell 2.8 million bbl to 238.3 million bbl in the same period, compared with market expectations of a 900,000 bbl increase. Both finished gasoline and blending components were down. Distillate fuel inventories dropped 1.3 million bbl to 159.9 million bbl. Traders were nearest in this estimate, guessing a 1.2 million bbl decline. The EIA petroleum report was delayed this week because of the Presidents Day holiday.

EIA also reported the withdrawal of 81 bcf of natural gas from US underground storage last week, just under the market consensus for withdrawal of 82 bcf. That left 1.83 tcf of working gas in storage, down 48 bcf from the year-ago level and 61 bcf below the 5-year average.

Imports of crude into the US declined by 160,000 b/d to 8.1 million b/d last week. In the 4 weeks through Feb. 18, crude imports averaged 8.6 million b/d, down 26,000 b/d from a comparable period in 2010. Total gasoline imports last week averaged 808,000 b/d, while distillate fuel imports averaged 171,000 b/d.

The input of crude into US refineries fell 328,000 b/d to 13.5 million b/d last week with units operating at 79.4% of capacity. Gasoline production decreased to 9.1 million b/d, while distillate fuel production declined to just under 4 million b/d.

Energy prices
The new front-month April contract for benchmark US light, sweet crudes climbed $2.68 to close at $98.10/bbl Feb. 23 on NYMEX. The May contract jumped by $3.02 to $99.82/bbl. On the US spot market, WTI at Cushing, Okla., advanced $2.78 to $96.35/bbl as it maneuvered to realign with the front-month futures contract price.

Heating oil for March delivery escalated 11.25¢ to $2.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 11.28¢ to $2.71/gal.

The March natural gas contract increased 3.3¢ to $3.90/MMbtu on NYMEX. “Despite warmer forecasts for March, natural gas gained 1% on the options expiration day for the March contract (which expires today) as games were played by large funds and shorts were squeezed,” Raymond James analysis said. This contract lost that 1% gain in early trading Feb. 24. As a result, they said, “March is set to roll off [at the close of that session] at a 9-year low. November, December, January, and February [gas contracts] all recently rolled off at 9-year lows as well.”

On the US spot market Feb. 23, gas at Henry Hub, La., dropped 6.2¢ to $3.82/MMbtu.

In London, the April IPE contract for North Sea Brent crude shot up $5.47 to close at $111.25/bbl. Gas oil for March gained $20.75 to $910.50/tonne.

The average price for OPEC’s basket of 12 reference crudes increased $1.87 to $105.88/bbl.

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