MARKET WATCH: US crude price gains; Brent price declines

The price of crude continued climbing Feb. 17 in the New York market with the front-month contract up 1.6% on a combination of positive leading indicators and Middle East unrest.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 18 -- The price of crude continued climbing Feb. 17 in the New York market with the front-month contract up 1.6% on a combination of positive leading indicators and Middle East unrest.

The price of North Sea Brent in London dropped, however, narrowing its premium over US benchmark crude to $16.23/bbl. Analysts in the Houston office of Raymond James & Associates Inc. reported natural gas fell 1.4% on a slightly bearish government report of the withdrawal of 233 bcf of gas from US underground storage in the week ended Feb. 11 (OGJ Online, Feb. 17, 2011).

Oil prices were up in early trading Feb. 18 in New York as traders positioned for a long weekend with the market to be closed Feb. 21 for the US Presidents Day holiday. Continued anti-government clashes in North Africa and the Middle East (MENA) fanned worries of possible oil supply disruptions.

“The market is likely to be more risk-averse ahead of a long weekend for the US market, as the political situation in MENA remains highly unpredictable. Looking ahead to next week, barring further developments in the MENA region, the market could be relatively quiet, with many market participants attending the International Petroleum Week in London,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. He said term structures for West Texas Intermediate strengthened Feb. 17 while those for Brent remained largely unchanged.

“The MENA situation remains very fluid,” said Zhang. “The army has taken over the capital of Bahrain. While Bahrain is not a significant oil producer, the concern in the market is again centered around contagion risk, similar to the Egyptian turmoil a few weeks ago.

Meanwhile, the US weekly jobless claim numbers were slightly higher than market consensus (410,000 actual vs. 400,000 consensus). The US consumer price index (CPI) for January was reported at 0.4% month-over-month, 0.1% higher than expected. The core CPI (excluding food and energy) was up 0.2%, also 0.1% ahead of expectation.

“These numbers show signs that high commodity prices have filtered through the US consumer prices but are still rather muted,” Zhang noted. “In contrast, there appears to be more evidence of inflationary pressures in Europe with German producer prices [up] 1.2% in January, which was twice the 0.6% forecast. This brought the annual rate up to 5.7%, the highest since October 2008.”

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “The narrowing of the WTI contango in April-May was very strong, and the focus was really on that spread rather than more generally on the whole curve. Rolling March to April could have had an influence, but the dynamics were too strong, in our opinion, to ignore.”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “The historic WTI-Brent spread of $1-2/bbl may have shifted to a normalized negative differential of about $2-3/bbl. Current physical market conditions in Cushing, Okla., and in Europe and Asia, however, have pushed the spread to historic lows of $15-20/bbl.
The US mid-continent region is over-supplied with crude oil, the Brent blend is under-supplied, and crudes similar to Brent are in high demand. Furthermore, Brent is likely being impacted by geopolitical tensions in the Middle East because of the potential impacts in the Mediterranean markets served by Brent. “

He said, “The spread could narrow in the short run if demand picked up in the US mid-continent, or if some of the geopolitical premium in Brent were to be reduced. A longer-term fix likely requires re-configuration of the crude oil and product pipeline networks into and out of Cushing, the WTI delivery point.” Sieminski said, “We believe that changes in the pipeline transportation network should bring WTI and Brent prices closer over time, but we do not foresee the re-emergence of a WTI premium.”

Jakob added, “The WTI discount to Brent narrowed very strongly, an illustration of the volatility on that spread which as we said before is likely to become the widow-maker of 2011. The WTI discount to Brent has no real implications for the transatlantic arbitrage of crude oil given that Light Louisiana Sweet and other US Gulf Coast crudes adjust for the differentials in the futures market. It has, however, significant implications for the inland arbitrage between the Midwest and the US Gulf Coast. US imports of Canadian crude oil are currently 60,000 b/d above last year, but in the fourth quarter crude flows [from the Midwest to the Gulf Coast] were already reaching record high levels and were 100,000 b/d higher than a year ago. That increase was from pipeline flows and before the jump in the Brent (and LLS) premium to WTI.”

He said the US Midwest “is heavily supplied; there is no denial of that.” But increased exports to the Gulf Coast show the Midwest is attempting to work out the imbalance. “A $20/bbl premium in the US Gulf Coast will surely help in finding even more inventive solutions,” Jakob said.

On Jan. 18, Jakob said, “Like every Friday we have to be ready for the [street conflict] headlines after the prayers in the Middle East.” He said, “With the unrest in the Middle East there has been less focus on the European affairs, but the yields on Portugal are reaching new record high and the bail-out talks will likely re-surface at some point.”

Energy prices
The March contract for benchmark US light, sweet crudes climbed $1.37 to $86.36/bbl Feb. 17 on the New York Mercantile Exchange. The April contract escalated $1 to $88.84/bbl. On the US spot market, WTI at Cushing was up $1.37 to $86.36/bbl.

Heating oil for March delivery fell 4.24¢ to $2.73/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.7¢ to $2.53/gal.

The March natural gas contract lost 5.3¢ to $3.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., decreased 3.2¢ to $3.88/MMbtu.

In London, the April IPE contract for North Sea Brent crude surrendered most of its gains from the previous session, down $1.19 to $102.59/bbl. Gas oil for March increased $5.75 to $873.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes rose $1.09 to $99.77/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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