MARKET WATCH: Oil prices decline as natural gas price rises

Oil prices were down Jan. 20, with front-month crude hovering below $100/bbl in the New York market, but natural gas futures managed a small increase.

“The past week’s moves remain relatively subdued. It would appear as though speculators remain unsure of the direction markets will take, as the threat of falling demand on the back of a weakening Euro-zone economy is countered by supply concerns owing to political tensions with Iran,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

On Jan. 23, the 27 foreign ministers of the European Union imposed an immediate embargo on new contracts to import Iranian crude or petroleum products refined from Iranian crude. But existing contracts can remain in force until July to provide time for those countries that import the most Iranian crude to find alternative supplies. EU officials plan a review of the embargo prior to that deadline.

If fully imposed, the embargo would prevent the sale to European customers of 450,000 b/d—some 30% of Iran’s oil exports. However, analysts generally regard it as a toothless threat to Iran at this point.

Still, analysts in the Houston office of Raymond James & Associates Inc. said, “With Japan and Korea following the EU in curtailing Iranian oil imports, that leaves China as the largest importer, and US and European diplomats will be striving to make sure Beijing doesn't offset Iran's loss of oil revenue.”

Meanwhile, negotiators failed again over the weekend to reach agreement with bondholders to restructure Greece’s sovereign debt.

Walter de Wet at Standard New York Securities Inc. said, “Our view of the past few days remains; we expect a further downward correction in oil prices in the short term. This should be prompted by an easing geopolitical situation in the Middle East, a soft physical oil market, and an upcoming spring refinery maintenance season in the northern hemisphere. That said, fundamentals remain fairly solid in the medium term for the oil market due to tight supply and low inventories.”

De Wet noted, “Crude oil is finding strong support from a weaker dollar or rather a stronger euro on the back of rising hope that some sort of solution might be reached with creditors on Greece’s debt. The euro has moved from the recent lows of $1.2623 reached on Jan. 13 to testing $1.2980 this morning.”

In other news, Raymond James analysts reported, “Above and beyond the opportunities for individual companies, the big picture here is that production from frontier countries—those with zero or minimal oil production currently—is bound to play a bigger role in global oil supply over time, given how many of the major oil producers are in decline (e.g., Mexico and the North Sea) or at least plateauing (e.g., Russia).”

However, frontier production “has been a decidedly mixed bag” since 2010 when Raymond James outlined the potential of 10 frontier countries and territories. “This is not surprising, considering that frontier exploration tends to be, by definition, the riskiest type of drilling—not just geologically but also politically and environmentally,” Raymond James analysts said. “A clear success has been Ghana, which is becoming an established oil producer thanks to the Tullow-operated Jubilee field. Notable disappointments include France (Hess and Toreador's Bakken look-alike play hit the wall after a ban on fracking), Greenland (Cairn's $600 million program didn't bear fruit), and Suriname (two expensive dry holes by Murphy).”

Raymond James analysts have added four more frontier areas to their list—Falkland Islands, Liberia, Namibia, and Portugal. They said, “Gas exploration in some frontier plays is also heating up, such as shale gas in Poland and deepwater gas in Mozambique.”

Energy prices

The February contract for benchmark US light, sweet crudes dropped $1.93 to $98.46/bbl Jan. 20 on the New York Mercantile Exchange. The March contract fell $2.21 to $98.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.93 to $98.46/bbl.

Heating oil for February delivery declined 4.76¢ to $2.99/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.14¢ to $2.78/gal.

The February natural gas contract, however, increased 2.1¢ to $2.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 10.5¢ to $2.26/MMbtu.

In London, the March IPE contract for North Sea Brent gave up $1.69 to $109.86/bbl. Gas oil for February dropped $10.25 to $933/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 22¢ to $111.37/bbl. So far this year, OPEC’s basket price has averaged $112.01/bbl.

Contact Sam Fletcher at samf@ogjonline.com.