MARKET WATCH: Brent crude hits 28-month high above $102/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 3 -- The price of North Sea Brent oil climbed above $102/bbl to a 28-month high in the European market Feb. 2 while benchmark US sweet, light crudes settled nearly flat in New York where turmoil in Egypt was overshadowed by a bearish increase in US inventories.

Crude stocks at the key Cushing, Okla., storage point reached 38.3 million bbl—“their highest level since record-keeping began in 2004,” said analysts in the Houston office of Raymond James & Associates Inc.

The Energy Information Administration reported 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 (OGJ Online, Feb. 2, 2011).

On Feb. 3, EIA reported the withdrawal of 189 bcf of natural gas from US underground storage in the week ended Jan. 28. That left 1.4 tcf of working gas in storage, 69 bcf less than in the same period a year ago but 5 bcf above the 5-year average.

Raymond James analysts reported, “Natural gas got a temporary weather-related [price] boost yesterday, rising 1.9% as updated weather forecasts call for colder than anticipated temperatures in the Midwest. They added, “Despite being located in the epicenter of the energy universe, even Houstonians were subject to rolling blackouts yesterday as Texas power supply was incapable of supporting cold-weather driven energy demand.” Both crude and gas prices were up in early trading Feb. 3.

However, analysts at Barclays Capital said, “In our view, beyond weather-related gyrations, natural gas remains the commodity with the least positive outlook.”

Many analysts credit political turmoil in the Middle East and North Africa (MENA)—especially Egypt—for the recent hike in energy prices. Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston said, “Although inventories at Cushing reached the highest ever recorded level and crude inventories increased more than expectations, the geopolitical risk premium kept the prices propped-up.”

Analysts at IHS CERA Inc. said, “The political upheaval in Egypt has provoked anxiety in oil markets, which are always fearful of any threat to big energy exporters in North Africa and to even bigger ones clustered in the [Persian] Gulf. Yet market reaction has been restrained, a notable response because there is continuing nervousness about unrest spreading in the region.”

They said, “To an extent, the risk for oil prices is to the up side. It is almost impossible for Egypt to return to the status quo that existed before Jan. 25. It is difficult to imagine a scenario, at least in the near term, that would fully address oil market concerns. Anxiety and fear will continue to be priced in to varying degrees. A sharp price spike is likely to trigger formal or informal action by the Organization of Petroleum Exporting Countries, which could act as a brake. The big Arab exporters in the gulf with almost all of OPEC’s spare capacity are uneasy at the prospect of oil prices above $100/bbl and are likely to counter it through increased output.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Looking ahead, the market will continue to be dominated by turmoil in the MENA region. The nature of the geopolitical risk makes it rather unpredictable, which has the potential to cause significant volatility in the market, in addition to asserting strong upward pressure on prices.

He said, “As OPEC holds back production increase, we believe that it would be in the interest of the global economy for the International Energy Agency to take a proactive approach by putting Strategic Petroleum Reserves on standby, i.e. ready to be released to the market.” He said, “History shows that even a temporary oil price spike can seriously damage the global economy. We believe that OPEC and the IEA could be putting the global economy at risk by allowing the oil price to overheat, as happened in 1990-91 during the First Gulf War.

Zhang said, “For the coming week, we expect the oil price to stay heated amid the unrest in the [MENA] region. For now, the data indicates that the economic recovery in the US and Europe remains robust, which is also supporting the oil price.”

But at Petromatrix in Zug, Switzerland, Olivier Jakob noted EIA reported an overall build of 5.5 million bbl in US inventories, with an increase of 8.2 million bbl in visible stocks (crude and clean petroleum product).

“This is the fourth consecutive large build in stocks of crude and clean petroleum products,” he said. “Over the last 4 weeks, they have built by 27.7 million bbl (about 1 million b/d) and for this time of year are way over the levels of any recent years. Prices might be at the same levels as early 2008, but US stocks of crude and petroleum products are higher by 103 million bbl. US petroleum stocks are basically huge for the season and the US stock draw of December is being dwarfed by the stock build of January.”

Inventories are so high, in fact, that the US “will have to find a way to stop” the stock build, said Jakob. “But that is not easy when there is a contango market and free financing provided by non-existent interest rates [through the Federal Reserve System]. High consumption is a way to reduce a stock-build, but with disposable income impacted by commodity inflation, demand is starting to face some head winds and implied demand for clean petroleum products on the 4-week average is falling to the very low levels of last year.” He said, “That is likely to get worse following the current blizzards.”

Jakob said, “Considering the level of demand, the level of stocks, and the spare capacity left in OPEC, the US is in an extremely comfortable supply situation. The ‘massive stock draws’ that were called to justify WTI heading to $110/bbl are just not there, and the current numbers do not make a case for an OPEC increase in supplies. We can guess that the bullish scenario will switch from ‘it’s bullish because of stock draws’ to ‘it’s bullish because there are no stock draws, so it makes it less likely that OPEC will increase supplies.’”

He said, “If US refineries are running at too high levels for the demand of products and are forced to reduce runs then this will back up more crude, which can then try to target instead a European destination. The problem is that despite the historic premium of Brent futures to WTI futures, Europe refiners are in maintenance and not screaming for crude oil. European physical differentials are not on fire, and we need to monitor the front contango on Brent which is starting to widen.”

Energy prices
The March contract for benchmark US sweet, light crudes inched up 9¢ to $90.86/bbl Feb. 2 on the New York Mercantile Exchange. The April contract rose 18¢ to $93.67/bbl. On the US spot market, West Texas Intermediate at Cushing was up 9¢ to $90.86/bbl.

Heating oil for March delivery increased 2.37¢ to $2.78/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, dropped 2.09¢ to $2.50/gal.

The March contract for natural gas increased 8.2¢ to $4.43/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 12¢ to $4.56/MMbtu.

In London, the March IPE contract for North Sea Brent gained 60¢ to $102.34/bbl. Gas oil for February was up $11.75 to $858/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased $1.27 to $97.66/bbl.

Contact Sam Fletcher at samf@ogjonline.com.