MARKET WATCH: Bearish inventories, continued European decline cut energy prices

The front-month natural gas price fell 3.8% Jan. 5 to a 28-month low in the New York market after a government report of a smaller-than-expected draw from US storage smothered the rare optimistic rally of the previous session.

The front-month natural gas price fell 3.8% Jan. 5 to a 28-month low in the New York market after a government report of a smaller-than-expected draw from US storage smothered the rare optimistic rally of the previous session. Crude oil declined 1.4% as bearish oil inventories and continued European woes prompted traders to shrug off favorable data from the US Department of Labor.

“Renewed signs of stress that emerged in the Italian and Spanish financial markets tempered investors' reaction to the announcement of a leaner US military and a pair of positive US labor reports,” said analysts in the Houston office of Raymond James & Associates Inc. “The European Central Bank again had to intervene to ease Italian bond yields, which topped the 7% threshold that is deemed unsustainable in the long run.”

Labor officials said US unemployment slipped to 8.5%, the lowest level since February 2009, with the addition of 200,000 jobs in December. It was the fourth consecutive month unemployment was reported to be receding. However, DOL does not count former workers who have exhausted their unemployment benefits and have given up looking for jobs. It also didn’t calculate how many of the new jobs were temporary due to seasonal hiring for the holidays.

Meanwhile, unemployment among the 17 member nations of the Euro-zone remains at 10.3% and is likely to climb as Europe slides toward recession. On Jan. 6, Fitch Ratings Ltd. downgraded Hungary's credit rating to junk status due to the government’s disagreement with the UN’s International Monetary Fund and the European Union over possible rescue loans.

Although the price of crude in dollars fell again in Jan. 5 trading, the price in euros was higher, said Olivier Jakob at Petromatrix in Zug, Switzerland. “The euro-dollar [valuation] is under severe pressure, and this means that at current world market prices for petroleum the European consumers are now paying peak 2008 levels. At current euro/barrel levels, we are extremely bearish on the European economy and European oil demand for 2012. The problem, however, is how to express that demand-destruction bearishness when at the same time the EU and the US are embarking on a drive to test the nerves of Iran. The Euro-zone is currently the epicenter of oil price formation as it holds the key to the dollar index and to the embargo on Iranian crude oil,” he said.

Meanwhile, Iran’s navy plans another military exercise in the Persian Gulf and Strait of Hormuz in February, “right after the [scheduled] formal EU decision on an embargo on Iranian crude,” Jakob noted. “According to International Public Law, Iran can restrict the passage of ships in its waters while it conducts military exercises. The US and Israel will hold very soon a major military exercise targeted against missile attacks from a hostile nation in the Persian Gulf.”

In other news, Jakob reported, “Petroplus [Holdings AG] has now lost all lines of credits; hence it is in our opinion only a matter of days until we hear that the Coryton [in Essex, England] and Ingolstadt [Germany] refineries are also shutting down.” The company previously announced plans to shut down three refineries in France, Belgium, and Switzerland (OGJ Online, Dec. 30, 2011).

The market should assume “the whole 670,000 b/d of refining capacity from Petroplus is very soon off line. In theory, taking such an amount of refining capacity should tighten the product supply picture in Europe, but at current euro/bbl prices…the amount of demand destruction still to come might offset some of the lost refining capacity. Pretty soon we will have European political leaders asking refineries not to pass the high cost of diesel to the consumers, asking refineries not to buy cheap Iranian crude oil, and asking banks to keep on lending to bankrupt refineries,” said Jakob.

He predicted, “As long as the fear of Iran is able to maintain some support on crude oil and the euro-dollar [valuation] continues to plunge, Europe will keep on driving faster and faster on Recession Avenue.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “As the sanction on Iran from the US and a seemingly imminent oil embargo from the EU take effect, Asian countries are looking to alternative suppliers to replace their imports from Iran. Saudi Arabia and Libya are likely to fill some of the gaps, and European crude oil is also been arbitraged to Asia. The situation will keep the Brent structure strong despite reduced crude intake from Petroplus as the company is fighting for survival. For now, tail-risk remains high for the oil market, although we still expect a diplomatic solution to be struck over the Iranian situation.”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “In our view, upside geopolitical risks outweigh the potential downside on prices from a slowing economy. Inventories are relatively low and supply and demand fundamentals point to declining Organization of Petroleum Exporting Countries spare [production] capacity over time. We are therefore maintaining our relatively bullish price forecasts.

However, he said, “While slower global growth this year will be reflected in moderating oil demand growth, potential power capacity issues in Asia may provide upside surprises to the oil balance, particularly for gas oil and fuel oil.”

In the US natural gas market, Sieminski said, “Storage is high; temperatures have been warmer than normal; and production continues at a strong pace. We have reduced our natural gas price forecast to $3.50/MMbtu for 2012.

He said, “After the volatility caused by the Fukushima nuclear accident last year, EU energy markets look set for a bleak 2012. We are concerned about slowing demand for power, gas, and carbon dioxide allowances in the face of an expected contraction in gross domestic product across the Euro-zone.”

US inventories

The Energy Information Administration reported the withdrawal of 76 bcf of natural gas in US underground storage in the week ended Dec. 30. That left 3.47 tcf of working gas in storage, up by 356 bcf from the comparable period a year ago and 458 bcf above the 5-year average.

It said commercial US crude inventories increased 2.2 million bbl to 329.7 million bbl in the same week, countering the Wall Street consensus for a 1 million bbl draw. Gasoline stocks gained 2.5 million bbl to 220.2 million bbl, above average for the time of year. That exceeded market expectations of a 1 million bbl increase. Finished gasoline inventories decreased while blending components increased. Distillate fuel inventories gained 3.2 million bbl to 143.6 million bbl; analysts had expected a 1 million bbl gain (OGJ Online, Jan. 5, 2012).

Energy prices

The February contract for benchmark US light, sweet crudes fell $1.41 to $101.81/bbl Jan. 5 on the New York Mercantile Exchange. The March contract dropped $1.40 to $102/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.41 to $101.81/bbl.

Heating oil for February delivery declined 5.11¢ to $3.09/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 4.87¢ to $2.74/gal.

The month natural gas dropped 11.6¢ to $2.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 5.7¢ to $2.91/MMbtu.

In London, the February IPE contract for North Sea Brent was down 96¢ to $112.74/bbl. Gas oil for January increased $1.75 to $966.50/tonne.

The OPEC office in Vienna was closed Jan. 6, and there was no price update issued.

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