MARKET WATCH: Crude oil prices continue to rally

Energy prices continued to rally as traders shook off Friday the 13th superstitions and a slowing Chinese economy, focusing instead on new US sanctions against the National Iranian Tanker Co. (NITC) and other alleged fronts for Iran’s oil trade.

The US Department of the Treasury said it would freeze US assets and block US financial transactions of the nominally private NITC, a former subsidiary of the National Iranian Oil Co. officially privatized 12 years ago. US officials claim the firm is still controlled by the Iranian government, however. In the past month, it reportedly has “reflagged” more than 30 of its tankers under new names and companies to circumvent international sanctions against Iranian oil imports.

“In practical terms, these new measures have relatively little bite to them,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “Iranian exports are down to around 800,000 b/d, shipped to three countries with waivers obtained from the US. Around 500,000 b/d is going to China, 200,000 b/d to India, and 100,000 b/d to Turkey, although this volume has fallen sharply since the start of the month. China uses Iranian tankers, while in the case of India it would appear that domestic tonnage has been used to ship the majority of Iranian oil cargos, rates for which come with Iranian insurance included.”

The new US measures will have no effect on these trades. “In fact it now seems that Japan will start shipping Iranian crude again shortly, with insurance provided by Japanese insurers acting with state guarantees. Meanwhile, South Korea is also said to be considering restarting imports using Iranian tankers and insurance,” KBC analysts said.

“So the chances are that Iranian exports in fact could increase in the coming months, rather than fall further as the extra $1/bbl on the price of oil in response to the news [last] week would suggest. Turkey’s long-term contract with Iran expires in August, and there may be another fall in exports then,” they said. “Otherwise, further reductions in exports likely will have to wait until the end of the 180-day waiver in early 2013, unless the US decides to change the rules mid-game.”

Chinese outlook

Meanwhile, the Chinese economy apparently mirrors the “half-full, half-empty” comparison, depending on which analyst one consults. In Houston, analysts at Raymond James & Associates Inc. reported, “Investors let out a sigh of relief [July 13] after China's second quarter gross domestic product growth came in at 7.6%, which was in line with analysts' expectations. With Chinese demand fears calmed, crude gained 1.2% [in the New York market]. However, given the recent downward trend in China's growth, many see further easing by the Chinese government as imminent. These hopes should provide a further boost to the markets as they intensify.”

On the other hand, KBC analysts said, “News that Chinese GDP growth in the second quarter slowed to an annualized 7.6%, the weakest in 3 years, has been completely ignored by the oil market with front month ICE Brent trading [above] $102/bbl.” They said, “The Chinese slowdown has long been expected and was already priced into the market.”

However, they said, “There is no doubt that the Euro-zone crisis is rippling across the world and into Asia. In China, growth in industrial production has also weakened, and recently released data show no growth in electricity production in June compared with the same period last year, indicating that manufacturing growth has stalled. Singapore has also reported a very weak second quarter with the economy contracting by just over 1% on an annualized basis. South Korea is also now expecting growth to average 3% this year and not 3.5%. On a wider basis the Asian Development Bank has cut its 2012 forecast for developing Asia as a whole from 6.9% to 6.3%.”

But despite “gloomy headlines,” KBC analysts said, “Forecasts of oil demand growth for the year as whole, our own included, tend to gravitate to the [increased] 600,000-800,000 b/d range and are mainly based on the assumptions of no material improvement in the Euro-zone crisis, an only anemic US recovery, and a slowdown in Asia. So unless there is a material deterioration in the overall situation, most of the downside to the macroeconomic picture is already in the price.”

Too much drilling?

Raymond James analysts said, “On the back of seemingly constant improvements in drilling efficiency and well productivity, we must ask ourselves, have we ‘drill, baby, drilled’ ourselves a little too deep? As a case in point, natural gas prices have traded below $6/Mcf for more than 3 years and appear to be mired at sub-$4/Mcf levels for another 3 years. As we now turn our sights to the remarkable surge in domestic oil supply, we must ask ourselves, how low do prices need to go in order to really slow down drilling?”

Raymond James’s analysis of market conditions “shows that the industry will continue to make economic returns at $65/bbl in the majority of onshore US oil plays, well below the current West Texas Intermediate strip at $88/bbl.” However, the analysts said, “Economics aren't the only deciding factor for developing a play. Cash flows and subsequent spending will surely get squeezed in a $65/bbl environment. Ultimately, it remains to be seen whether the industry has learned its lesson from the gas-drilling frenzy, but we're not counting on it.”

Energy prices

The August contract for benchmark US light, sweet crudes rose $1.02 to $87.10/bbl July 13 on the New York Mercantile Exchange. The September contract climbed $1.04 to $87.50/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.02 to $87.10/bbl.

Heating oil for August delivery increased 1.49¢ to $2.79/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.99¢ to $2.82/gal.

The August natural gas contract was unchanged at $2.87/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 8.7¢ to $2.88/MMbtu.

In London, the August IPE contract for North Sea Brent advanced $1.33 to $102.40/bbl. Gas oil for August escalated $13.75 to $879.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.78 to $99.10/bbl. So far this year, OPEC’s basket price has averaged $110.95/bbl.

Contact Sam Fletcher at [email protected].