MARKET WATCH: Brent passes $100/bbl mark

Energy prices continued climbing Jan. 31 with North Sea Brent crude closing above $100/bbl for the first time in more than 2 years, as civil unrest continued to spread in North Africa and the Middle East.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 1 -- Energy prices continued climbing Jan. 31 with North Sea Brent crude closing above $100/bbl for the first time in more than 2 years, as civil unrest continued to spread in North Africa and the Middle East.

In the New York market, crude jumped 2.9% on fears that increased efforts in Egypt to oust the current government could disrupt oil supplies through the Suez Canal. Natural gas climbed 2.2% on forecasts for cold weather through the rest of this winter. However, analysts in the Houston office of Raymond James & Associates Inc. said both oil and gas posted losses in early trading Feb. 1 and might surrender some of their previous gains.

The biggest protest yet was reported in Cairo on Feb. 1 demanding an end to President Hosni Mubarak’s nearly 30 years in power. The US has ordered nonessential government personnel and families to leave Egypt, and several oil and service companies are bringing their employees home. In Jordan, King Abdullah II fired his government, installed a new prime minister, and ordered economic improvements and for the people to have a greater say in politics, in response to demonstrations in that country. Neither country is a net exporter of oil.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “We believe that prices are reflecting close to $5/bbl risk-premium due to fears of supply disruptions at the Suez Canal.”

At Petromatrix in Zug, Switzerland, however, Olivier Jakob pointed out: “Brent was already trading at $99.20/bbl and trying to break $100/bbl before [the riots in] Egypt so in a sense we could say that the fear of the Suez-Sumed [(Suez-Mediterranean) Pipeline] closure has only brought so far a $1-2/bbl premium to oil prices. The protesters in Egypt are fighting for the removal of an aging ruler, not for the destruction of their country, and for now we have not seen many attacks on infrastructure (roads, airports, railways, etc.) that can lead us to believe that protestors have a plan to sink a few ships in the middle of the Suez or blow up the Sumed pipeline. And while anything with the name ‘Middle East’ quickly brings out scenarios of wars, we need to keep in mind that the country that would probably suffer the most from any closure of the Suez-Sumed would be Iran. It has some problems selling its oil to Asia and is currently very dependent on the European market and therefore of the transit through Egypt.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reiterated, “We see a low probability that the Suez Canal and Sumed Pipeline will be affected in the short term. However, the situation remains in flux. Besides, there is also a risk that the unrest might spread to neighboring countries, including major oil producers like Algeria and Libya.”

Zhang expects continuing turmoil in the Middle East and North Africa to support higher oil prices. “The strong manufacturing data from the US, Europe, and China should also continue to provide support,” he said. “However, high oil prices will be a drag on the global economic recovery. To prevent this would require a more proactive approach from the Organization of Petroleum Exporting Countries in avoiding further oil price spikes.”

The US reported better-than-expected personal spending for December and a strong January Chicago Purchasing Managers Index, “hitting a record high in 22 years,” Zhang reported. “This morning, the Eurozone PMI manufacturing survey for January came at 57.3, ahead the expected 56.9, implying that the manufacturing section is expanding strongly. In addition, China’s PMI Manufacturing survey also points to growth with an index of 52.9, albeit slightly below an expected 53.5.”

In other news, front-month WTI had an 81¢/bbl net gain in January while front-month Brent escalated by $6.26/bbl. “However, the term structure of both Brent and WTI weakened for the month,” Zhang said. “The underperformance in WTI at the front-end of the market partly reflects concerns over Cushing, Okla., storage.”

Meanwhile, Jakob noted, “With the all time record high volume in WTI on the New York Mercantile Exchange on Jan. 28 combined with a price surge and asset managers rushing to buy anything related to oil on the belief that the Suez was about to be shut-down, one could have expected to see some increase of open interest. But no, open interest in WTI was down, suggesting a predominance of short covering or some traders taking the opportunity to offload some of their length.” He said, “One way or another, a price surge with a surge of volume and a decrease of open interest is usually not a positive technical sign and we will have to watch closely the futures open interest data later today.”

Energy prices
The March contract for benchmark US sweet, light crudes jumped by $2.85 to $92.19/bbl Jan. 31 on NYMEX. The April contract escalated by $2.60 to $94.28/bbl. On the US spot market, WTI at Cushing, was up $2.76 to $92.19/bbl, back in line with the front-month future contract price. Heating oil for February delivery gained 5.66¢ to expire at $2.75/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.38¢ to $2.49/gal.

The March natural gas contract advanced 9.7¢ to $4.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rebounded by 14.5¢ to $4.44/MMbtu.

In London, the March IPE contract for North Sea Brent crude rose $1.59 to $101.01/bbl. Gas oil for February increased $11.25 to $835.50/tonne.

The average price for OPEC’s basket of 12 reference crudes gained $1.43 to $95.53/bbl.

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