MARKET WATCH: False report triggers oil price spike

Crude oil prices jumped Mar. 1 with North Sea Brent climbing to a 4-year intraday high above $128/bbl on a false report by Iran's Press TV of a pipeline explosion in eastern Saudi Arabia.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Brent shot up by more than $2/bbl within 5 min.” Prices retreated when the Saudis denied the report, but the front-month Brent contract closed above $126/bbl, up more than $3 for the day. Oil prices retreated in early profit-taking Mar. 2 ahead of the weekend.

The price spike demonstrated “how jittery the oil market has become and how wide the fear premium in oil prices is,” said analysts in the Houston office of Raymond James & Associates Inc. They reported Iran benefited from the price spike “to the tune of $12 million that 1 day alone.”

Zhang said, “Oil products were dragged up by crude, while time spread of products weakened further. The front-end of Brent structure also jumped, then fell back sharply, but remained in steep backwardation by historical standards.”

He said, “Clearly the oil market has entered a stage of violent correction, as both bulls and bears are extremely nervous. Headlines, even rumors, are now the main driver. Some sizable stops must have been triggered during later trading session yesterday; price moves were also amplified by low liquidity during later hours. We should expect more money flow driven by intraday market volatility for at least the first week of the new month, given the very high speculative length in the oil market and the scheduled monthly rolling programs for index funds. This will also continue to drive the extremely volatile West Texas Intermediate-Brent spread market.”

Oil prices are likely to remain heated with media focused on a potential military strike involving Iran. “However, we do expect weakness in the physical market to bite,” said Zhang. “Refining margins in Europe are very poor. The time spread in Brent has to rely on arbitrage to Asia for support. While we are not trying to downplay the geopolitical risks that threaten global oil supply or exaggerate demand destruction, we do not see going long or short oil futures at the current levels as preferred trading strategies. Instead, we favor strategies such as put spreads or call spreads to express one’s directional view of the market.

Energy prices

The April contract for benchmark US light, sweet crudes climbed as high as $110.55/bbl before settling at $108.84/bbl, up $1.77 for Mar. 1 on the New York Mercantile Exchange. The May contract gained $1.75 to $109.27/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.77 to $108.84/bbl.

The new front-month April heating oil contract increased 6.94¢ to $3.28/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 9.45¢ to $3.35/gal.

The April natural gas contract dropped 15.3¢ to $2.46/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 3.1¢ to $2.40/MMbtu.

In London, the April IPE contract for North Sea Brent jumped to an intraday high of $128.40/bbl before closing at $126.20/bbl, up $3.54 for the day. Gas oil for March was up $6.75 to $1,009.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.29 to $122.08/bbl.

Contact Sam Fletcher at

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