MARKET WATCH: Energy prices rebound with extended fighting in Libya

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 7 -- Energy prices jumped Mar. 4 in New York and London markets as rebels fought on equal footing with Libyan government forces. Even natural gas prices climbed on expectations US storage by the end of this month will be below last year’s end-of-winter level.

“In conjunction with the ongoing geopolitical instability in Libya, Brent crude advanced 1% last Friday for its sixth consecutive weekly gain. West Texas Intermediate crude also rose 2.5%,” said analysts in the Houston office of Raymond James & Associates Inc. However, energy stocks did not share in that rally as the broader market fell 0.7% “as investors continued to fear the negative impact of soaring oil prices on a burgeoning global economic recovery,” they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported the front-month WTI-Brent spread continued to narrow. “Net for the week, front-month WTI and Brent surged by $6.54/bbl and $3.83/bbl respectively,” he said.

Zhang said, “The risk of a prolonged civil war in Libya has increased. Elsewhere in the region, protests in Bahrain and Oman show no sign of abating, while protests in Egypt reerupted over the weekend. With these developments, Oman reshuffled its cabinet for the second time in a week, while Saudi Arabia imposed a ban on all protests. Overall, the political situation in the Middle East and North Africa (MENA) has deteriorated over the past few days.”

He said, “Outside the US, inflation worries have heightened on the back of heated commodity prices. The European Central Bank signaled a rate increase next month, which caught the market by surprise. In most major equity markets, concerns over high oil prices are clearly exhibited as they have been displaying an inverse relationship with oil markets recently.”

Meanwhile, US factory orders climbed 3.1% in January, the most since September 2006, while the economists were expecting a gain of 2%. The unemployment rate fell below 9% to 8.9%, the lowest level in almost 2 years.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “So far, the market is seeing the current surge in prices as temporary spike rather than a structural shift. However, the prices have reached levels [that] could knock the recovery back, and we could start to see the effect of rising crude prices in the economic data over the coming months if crude remains elevated over a protracted period.”

A late push in the last 20 min of the Mar. 4 session managed to let the Standard & Poor’s 500 index show an increase for the week. “But that was a lot of effort for not much as the S&P finished up 0.1% on the week (but still up 5.05% for the year) while the NASDAQ was up 0.13% for the week and 4.97% for the year,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The surge in oil prices has started to shake the confidence in the QE2 [the second phase of the Federal Reserve System’s quantitative easing] ‘buy-the-dip’ trade.”

Jakob noted, “The US administration is making more reference to the possibility of using the Strategic Petroleum Reserve (SPR).” He said, “If there was a release of SPR sweet crude oil, then we will need to watch for a narrowing of the Brent premium to WTI as it would pressure the Light Louisiana Sweet premium to WTI. Likewise given that a sale of crude oil now will have to be matched by a purchase later for the refill, it should also help to flatten the curve [and] help the contango.”

Energy prices
The April contract for benchmark US light, sweet crudes gained $2.51 to $104.42/bbl Mar. 4 on the New York Mercantile Exchange. The May contract climbed $2.52 to $105.61/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.06 to $104.42 as it again realigned with the front-month futures contract.

Heating oil for April delivery gained 4¢ to $3.09/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.02¢ to $3.05/gal.

The April natural gas contract advanced 3.1¢ to $3.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1¢ to $3.74/MMbtu. Gas futures prices were up as “the weather came back to create some additional demand before entering the injection season. Nonetheless, the overall tone of the market remains bearish and the prices fell 19.6¢ or 4.9% week-over-week,” Sharma said. “However, the prices could find some support this week as it seems that the gas rig count has started to decline again after holding firm in February.”

In London, the April IPE contract for North Sea Brent crude regained $1.18 to $115.97/bbl. Gas oil for March rose $6.75 to $966.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 94¢ to $111.42/bbl. So far this year, OPEC’s basket price has averaged $97.69/bbl.

Contact Sam Fletcher at samf@ogjonline.com.



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