MARKET WATCH: Sell-off of crude lowers energy prices

Energy prices fell Feb. 11 with a sell-off of crude after Hosni Mubarak finally handed in his resignation as Egypt’s president, defusing geopolitical pressures on petroleum products at least for the present.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 14 -- Energy prices fell Feb. 11 with a sell-off of crude after Hosni Mubarak finally handed in his resignation as Egypt’s president, defusing geopolitical pressures on petroleum products at least for the present.

In the New York market, the benchmark US light, sweet crude surrendered all of its gains from the 2 weeks of political turmoil in Egypt. North Sea Brent crude held firm, however, with a small gain on the expiry of its March contract.

“Net for the week, front-month West Texas Intermediate lost $3.45/bbl, while front-month Brent gained $1.60/bbl, as these two benchmarks continued on their diverging paths,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “The front-month WTI-Brent spread continued to trade at a rather broad level, $15.85/bbl” in Brent’s favor at the close of the Feb. 11 session. Term structures for WTI weakened further in anticipation of more crude inventory build in the US, particularly at Cushing, Okla., the key storage and transfer point for crude, he said.

As the international benchmark against which other crudes are priced, “WTI is dead, long live Brent!” said analysts in the Houston office of Raymond James & Associates Inc. The recent price disconnect of WTI “is here to stay—for awhile,” they said.

“We have all been accustomed to using WTI as the proxy for global oil prices,” Raymond James analysts said. “However, we now think the current supply glut at Cushing is a structural issue that is unlikely to be fully resolved anytime soon. That means WTI will become much less relevant than it has been historically. This is true for US oil producers [who] don't transport their oil to Cushing and even more so for companies with international operations.”

They said, “It appears that the long-term solution to the glut—more outbound pipeline capacity at Cushing—will take at least 18 months to materialize. With this in mind, we have initiated our first-ever forecast for Brent, which we believe will be the principal benchmark for global oil prices for the foreseeable future. We are projecting a full-year 2011 Brent average of $97.50/bbl (vs. $90/bbl for WTI), followed by $104.50/bbl in 2012 (vs. $100/bbl for WTI). While the current record-setting WTI discount vs. Brent should narrow over time, we doubt that WTI will revert back to its traditional premium until 2013 at the earliest.”

Energy prices
The March contract for benchmark US light, sweet crudes dropped $1.15 to $85.58/bbl Feb. 11 on the New York Mercantile Exchange. The April contract decreased 81¢ to $89.13/bbl. On the US spot market, WTI at Cushing was down $1.15 to $85.58/bbl, in line with the front month futures price.

Heating oil for March delivery declined 1.49¢ to $2.70/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.46¢, closing at a rounded $2.47/gal.

The March natural gas contract lost 7.6¢ to $3.91/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 14.3¢ to $3.97/MMbtu.

In London, the March IPE contract for North Sea Brent crude gained 56¢ to $101.43/bbl. Subsequent months through December posted losses but remained in contango. Gas oil for March dropped $11.50 to $850.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 22¢ to $97.37/bbl. So far this year, OPEC’s basket price has averaged $94.07/bbl. OPEC offices in Vienna will be closed Feb. 15.

Contact Sam Fletcher at samf@ogjonline.com.

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