MARKET WATCH: Brent still climbing above $101/bbl; WTI price declines

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 2 -- The front-month crude contract fell 1.7% Feb. 2 in the New York market due to concerns about US inventories, but North Sea Brent continued its climb in the UK to the highest closing price since September 2008.

“US investors warmed up to another slew of positive economic data and earnings reports, as the Standard & Poor’s 500 index gained 1.7%, reaching its highest level since June 2008,” said analysts in the Houston office of Raymond James & Associates Inc. Energy stocks underperformed the broader market, however, as crude and gas prices fell. The natural gas price was down nearly 2% on forecasts of milder weather near the end of “one of the coldest winters in the past 20 years,” they said. Raymond James analysts foresee “another summer of weak gas prices.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted the $100/bbl price for North Sea Brent crude “dominated many headlines” as that oil remained above “this psychologically important” price level. “More short positions in the West Texas Intermediate crude and Brent spread appear to have been reestablished,” he said. “Consequently, the front-month WTI-Brent spread widened by $2.03/bbl to $10.85/bbl yesterday. The term structure of WTI also softened, while that of Brent was largely unchanged.”

Geopolitical outlook
Zhang noted the continuing turmoil in Egypt. “Moreover, the geopolitical tension and political instability seemed to have spread well beyond Egypt’s borders, as the King of Jordan fired his cabinet yesterday amid reports of further protests in Yemen, Syria, and Algeria. That said, however, the impact on the markets has diminished somewhat, though it will remain a supportive factor for the oil market,” he said.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “Journalistically the strength of Brent has been linked to the events in Cairo. However, the closure of the Suez Canal would impact first the Asian and the European markets, and we have to note that, since the Egyptian revolt started, the buying in crude oil has not come in the Asian or in the European hours (no visible signs of panic from the markets that would be impacted) but in the American hours. On Jan. 31, there was a strong decrease of open interest in Brent, and it seems to us that the main trade remains the Brent-WTI spread rather than a flat price view on the global supply and demand or on the ‘tensions in the Middle East.’”

However, analysts at KBC Energy Economics (formerly KBC Market Services), a division of KBC Advanced Technologies PLC, said, “The civil and social unrest that has spread from Tunisia across North Africa and last week touched the Arabian Peninsula (Yemen) has put geopolitical tensions back on the oil price agenda.” They said, “After 2 years in which sky-high inventories masked the impact of geopolitical events, resurgent oil demand and the prospect of tightening stocks have made the market once again more sensitive to potential supply disruptions.”

KBC analysts said, “Egypt is now teetering on the brink of a power change, just weeks after the Jasmine Revolution in Tunisia that swept away the 23-year regime of President Ben Ali.” They said, “The [Egyptian] government has promised reforms, but their grip on power looks shaky given that the army has already said it will not fire on the protesters. Most commentators are now not questioning whether [President Hosni] Mubarak will go, but when and how.”

The move by Egyptians to oust their government “sparked fears that similar unrest could spread across North Africa and the Middle East.” KBC analysts said, “Neighboring countries to the west of Egypt include Algeria and Libya, both prominent North African oil producers, which also cradle Tunisia, the country where much of the recent unrest started. If the unrest were to spread to the Organization of Petroleum Exporting Countries’ two North African members it could impact on oil supply to the Mediterranean as together they produce 2.84 million b/d. They have the capability to supply over 3.2 million b/d if it weren’t for output quota restrictions imposed on the OPEC member countries. Egypt currently produces around 690,000 b/d of oil and Tunisia around 75,000-80,000 b/d.”

But oil and gas production in Tunisia apparently has not been affected by the revolt. And although several upstream companies have suspended drilling operations in Egypt and evacuated foreign staff as a precaution, production operations are currently reportedly unaffected. Jakob earlier observed, “The protesters in Egypt are fighting for the removal of an aging ruler, not for the destruction of their country (OGJ Online, Feb. 1, 2011).”

As for the unrest spreading, KBC analysts said, “Any such ‘contagion’ we believe will be mainly towards the less affluent Middle Eastern nations in North Africa and potentially in the Levant. After protests in Jordan, King Abdullah II sacked his government; and there have been recent outbreaks of protest in Algeria and Yemen, albeit not on the scale of those seen in Egypt. Iran also had faced antigovernment protests even before the revolt in Tunisia, and there is a risk these may resurface.”

They noted gross domestic product per capita in the region “ranges from $2,000 in the poorest countries to $85,000 in the wealthiest. In the five countries so far affected by protest, GDP per capita is on average around $5,000.” In countries other than Yemen around the Persian Gulf, GDP per capita averages around $42,000.

Analysts at Barclays Capital Research said, “About 14% of the world's LNG trade transits the Suez Canal each day, the vast majority of which are cargoes originating in the Middle East and heading towards Atlantic Basin markets. We believe the canal is not under immediate threat from the current political crisis in Egypt. However, in the unlikely event that the Egyptian government opted to close the Suez Canal, we estimate that the impacted LNG trade flows would amount to about 3.1 tonnes/month (5 bcfd).” Closure of the canal “would not mean any significant loss of production volumes,” they said.

Barclays Capital analysts said, “Most Egyptian drilling activity has been halted as a result of the political instability, as several international E&P companies have announced staff evacuations. Gas production, however, has not been affected so far, and there have been no reports of force majeure on LNG deliveries. Egypt’s sea ports are officially open, although staff shortages and an absence of customs officials at the Alexandria and Damietta ports are reported to cause traffic disruptions.”

They said, “A change in gas export policy for political reasons does not appear to be on the immediate horizon. An interim military government would likely honor the existing agreements, while a national unity government led by someone like the Nobel Prize winner Mohamed El Baradei would also probably preserve the status quo. A significant shift in export policy would seem to require a very radical, anti-western government emerging in power from the crisis. The same would seem to hold true for the potential expropriation of western companies’ energy assets. While such a turn of events cannot be completely discounted, this does not seem to be the most likely outcome at the moment.”

US inventories
The Energy Information Administration said Feb. 2 commercial US crude inventories increased by 2.6 million bbl to 343.2 million bbl in the week ended Jan. 28. That is above average for this time of year and slightly more than the Wall Street consensus for a 2.5 million bbl gain. Gasoline stocks jumped 6.2 million bbl to 236.2 million bbl, surpassing analysts’ expectations of a 2 million bbl build. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel stocks fell 1.6 million bbl to 164.1 million bbl, surpassing the consensus for a 1 million bbl decrease.

Imports of crude into the US fell 371,000 b/d to 9 million b/d in the same period. In the 4 weeks through Jan. 28, US imports of crude averaged 9.1 million b/d, 641,000 b/d more than in the comparable period in 2010. Gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 1.2 million b/d, while distillate fuel imports averaged 318,000 b/d.

Input of crude into US refineries increased by 175,000 b/d to 14.3 million b/d last week with units operating at 84.5% of capacity. Gasoline production increased slightly to 8.8 million b/d. Distillate fuel production decreased to 4.2 million b/d.

Energy prices
The March contract for benchmark US light, sweet crudes fell $1.42 to $90.77/bbl Feb. 2 on the New York Mercantile Exchange. The April contract dropped 78¢ to $93.50/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.42 to $90.77/bbl. Heating oil for March delivery increased 1.67¢ to $2.76/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 1.93¢ to $2.52/gal.

The March natural gas contract fell 7.3¢ to $4.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $4.44/MMbtu.

In London, the March IPE contract for North Sea Brent crude increased 73¢ to $101.74/bbl. Gas oil for February escalated by $10.75 to $846.25/tonne.

The average price for OPEC’s basket of 12 reference crudes was up 83¢ to $96.39/bbl.

Contact Sam Fletcher at [email protected].