MARKET WATCH: Crude slips lower; North, South Korea clash rattles markets

The new front-month January contract for crude continued to slip lower Nov. 22 in low-volume trading in the New York market as initial relief at the pending bailout of Ireland’s banks gave way to concern over the details and implications.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 23 -- The new front-month January contract for crude continued to slip lower Nov. 22 in low-volume trading in the New York market as initial relief at the pending bailout of Ireland’s banks gave way to concern over the details and implications.

Energy prices likely will be affected today by the early morning exchange of artillery fire between North and South Korea in one of the most dramatic clashes since the Korean War. The Associated Press reported the conflict occurred when North Korea shelled an island near the disputed sea border, killing two South Korean marines and forcing civilians to flee. The hour-long exchange of gunfire “rattled markets,” said analysts in the Houston office of Raymond James & Associates Inc.

“The overnight incident between South and North Korea could start to bring some support…to the dollar per se,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Given that the main area of growth is out of emerging Asia, the escalation of tensions between North and South Korea is not a positive development for oil markets.”

Jakob noted, “We are in front of a very long weekend [with US equity and commodity markets to be closed Nov. 25-26 for the Thanksgiving holiday in the US]. Long weekends usually lead to short covering, but the recent political uncertainties in Ireland and the military escalation between North and South Korea would plead for reduction of risk in front of the holidays. On West Texas Intermediate, the level of $80.50/bbl has so far been well defended as below $80/bbl there will be a significant liquidation risk given the record net length still held in oil by large speculators. The end of the year is approaching, the large speculators are left alone holding the net length in WTI, and they had not planned for the political uncertainty of Ireland or of the Koreas.”

Raymond James analysts said, “Yesterday mounting concerns and uncertainty regarding Europe's economic health sent both the broader markets and crude down slightly (0.2% and 0.4%, respectively). Energy stocks were mixed.” Natural gas continued to rise, up 2.5% on Nov. 22 on speculation of a colder winter.

“Monetary policy tightening in China is still looming large on the energy market,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. In the New York market, he said, volume remains “relatively low” prior to the Thanksgiving holiday. For the rest of this week, he said, “We continue to see the development in the financial market to overshadow the oil market. Sideway movement is likely for the rest of the week, bar significant news on Chinese rate increase or the eurozone debt situation. For the rest of year, we expect oil market to stay anchored by the weak but slowly-improving supply-demand fundamentals.”

Zhang reported, “Cracks and margins weakened slightly yesterday in general, so did physical differentials and time spread. This we believe is partly due to yearend destocking we will start to see over the next few weeks.”

He noted, “Nigerian oil production continues to be affected by attacks on its oil facilities providing marginal [price] support. However, the main focus remains on the US where we expect oil inventories to continue to decline, mainly on the back of higher seasonal demand and an increase in the discounted US benchmark prices. However, the gasoline arbitrage from Europe to the US has been open for the past 2 weeks, which should see gasoline shifting to the US. On top of this, increased refining throughput in China to boost diesel production (following the recent diesel shortages in China) is set to increase gasoline supply as well. Overall, we believe the recent counterseasonal strength in gasoline cracks is likely to be short-lived.”

Jakob denounced both the Federal Reserve Bank’s second phase of quantitative easing of the US economy and the European Union-International Monetary Fund bailout of Ireland as failures. “The announced rescue of Ireland provoked an increase, not a decrease in credit default swaps as it also comes with new political uncertainties,” he said. “It seems that the markets are not any more buying the idea of governments (be it American or European) throwing money at a problem to hide it.”

Moreover, he said, “Portugal and Spain are now attracting more focus, but we fear that we will soon start to focus again on the banking sector. The rescue of Ireland could also be seen as a hidden rescue of banks not only in Ireland but in continental Europe. Hence if political uncertainties persist in Ireland, this could start to be negative for the broader European markets.” The euro yesterday took a hit on the Irish political uncertainty and weakened further overnight, Jakob said.

Energy prices
The new front-month January contract for benchmark US light, sweet crudes retreated 24¢ to $81.74/bbl Nov. 22 on the New York Mercantile Exchange. The February contract declined 25¢ to $82.33/bbl. On the US spot market, WTI at Cushing, Okla., gained 23¢ to catch up with the new front-month market price of $81.74/bbl. Heating oil for December delivery dipped 0.58¢ but its closing price was essentially unchanged at a rounded $2.27/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 4.41¢ to $2.15/gal.

The December natural gas contract climbed 10.7¢ to $4.27/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 13.5¢ to $3.93/MMbtu.

In London, the January IPE contract for North Sea Brent crude dropped 38¢ to $83.96/bbl, still at a premium to WTI. Gas oil for December lost $4.75 to $700.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell 41¢ to $80.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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