The front-month natural gas contract jumped 7% on Feb. 2, ending a 3-day losing streak in the New York futures market. Front-month crude, meanwhile, dropped more than 1% while in London the price of Brent increased, widening its premium over West Texas Intermediate.
“The oil market came under considerable pressure, in particular the WTI market, spurred by nervous market sentiment ahead of US nonfarm payroll data,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “Oil products fared much worse than Brent, resulting in weaker product cracks and refining margins, driven by bearish US oil inventory data [released Feb. 1] as well as the bearish product inventory data in Europe. The Brent structure, however, was firmer yesterday as the physical crude market remains tight outside the US.”
The US Department of Labor reported Feb. 3 an increase of 243,000 jobs during January, far more than economists expected. As a result, the US unemployment rate dropped to 8.3%, its lowest level in 2 years.
Despite recent arctic weather in many parts of Europe, distillate inventories in the Amsterdam, Rotterdam, Antwerp region rose sharply to “the seasonal level of the previous 2 years when the market was abundantly supplied,” Zhang reported. “Product stocks in Singapore also increased last week, led by a sharp increase in residue stocks, as record strong levels of fuel crack has been attracting arbitrage cargoes and increased supplies from refineries in the region. By contrast, the distillate market in Asia remains fairly tight.”
Weekly product inventory data for the US, Europe, and Asia “clearly suggest” a comfortable level worldwide. More importantly, Zhang said, “The global refining system maintains a relatively high level of spare capacity, which gives the necessary flexibility to avoid significant supply shocks in the product market. The counter-seasonal build of gas oil inventory in Europe paints a fairly bearish picture of distillate cracks and refinery margins in the region.”
Some cite the glut of crude inventory at Cushing, Okla., as the reason for the widening spread between Brent and WTI. However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The surge of the last few days in the Brent-WTI spread would suggest either extreme weakness in WTI or extreme tightness in Brent, but neither the Brent or WTI time-spreads suggest such a scenario.” Cushing stocks currently are more than 10 million bbl below their peaks of last year. “This allows for some stock build before the barrels start to be distressed in Cushing,” said Jakob. Furthermore, he said, “If the Brent-WTI spread was starting to re-price a Cushing glut, we would expect to see some pressure on the time-spreads. Instead, the shallow contango in WTI has almost not moved since last week.”
Jakob said, “It might be that the Brent-WTI spread is widening not because of extreme weakness in WTI but because of extreme strength in Brent. In the week ending Jan 29, there was a small drop in the Buzzard [oil field] contribution to the Forties system [in the UK sector of the North Sea] and a few cargoes have been delayed, but we are far from the supply disruption seen during the summer. There have been also a few cargoes of Forties [crude] pushed to the Far East over the last 3 months, but on the other side there has been a significant loss of sweet crude oil demand on the US East Coast and the restart of [oil production in] Libya. If the Brent backwardation did tighten slightly since last week and the cash differentials as well, we are very far from the super-backwardation seen during the summer.”
He noted, “The time-spreads in Brent and in WTI have not moved much, the heating oil crack to Brent has not moved much, but the RBOB [reformulated stock for oxygenate blending] crack to Brent had a very sharp correction—not as sharp as the move on Brent-WTI but very close to it and quite a sharp move compared to the other relative values. Hence, we ask ourselves if the move in the Brent-WTI spread is really a story about crude oil or a story about gasoline where selling on the crack (selling RBOB; buying Brent) has spilled over into a wider Brent premium to WTI.”
Jakob said, “One way or another, the gasoline crack has been coming off sharply these last 2 days during the recent surge of the Brent-WTI spread, and that is starting to work against the refining margins. They are not yet in the disaster area of the fourth quarter, but they are trending down; hence if the current dynamics continue and the Brent-WTI spread moves to $20/bbl but against the gasoline crack (and to a lesser extent also to the gas oil crack), then we risk moving back to the poor refining margins of the fourth quarter, and that will then put pressure on the Brent time-spreads.”
The March contract for benchmark US light, sweet crudes never climbed above $98/bbl in intraday trading Feb. 2 and fell $1.25 to close at $96.36/bbl on the New York Mercantile Exchange. The April contract also dropped $1.25, to $96.74/bbl. On the US spot market, WTI at Cushing followed the March futures contract down $1.25 to $96.36/bbl.
Heating oil for March delivery inched up 0.74¢ to $3.05/gal on NYMEX. RBOB for the same month lost 2.33¢ to $2.87/gal.
The March natural gas contract rebound 17.2¢ to $2.55/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.7¢ to $2.35/MMbtu.
In London, the March IPE contract for North Sea Brent was up 51¢ to $112.07/bbl. Gas oil for February fell $7.50 to $947.75/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 20¢ to $110.82/bbl. OPEC’s Vienna office will be closed Feb. 6.
Contact Sam Fletcher at email@example.com.