MARKET WATCH: Crude oil, natural gas rebound among mixed market indicators

Crude oil prices rose in a late rally, recouping earlier intraday losses Feb. 29 in the New York market, after Federal Reserve Chairman Ben Bernanke warned of a slow national recovery and made no mention of a possible third round of quantitative easing to stimulate the economy.

But Bernanke’s message disappointed equity markets, with the Standard & Poor’s 500 Index finishing marginally lower, ending a 4-day rally. Natural gas climbed 3.7%, however, ending its 4-day downturn on new predictions for colder weather.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil products, however, weakened on the day despite product draws reported in the US Department of Energy’s weekly oil inventory report—another sign of demand being crippled by high prices. Refining margins were further eroded and, if it were to persist at the current levels or move lower, we should expect refining run cuts in Europe. In turn, this would cool the heated crude oil prices and the time spread of Brent.”

He said, “The rather volatile market moves near market close during the past two trading sessions coincided with month-end as market participants squared their positions. 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.”

Although inventory data suggested a relatively more-bullish picture in oil products than crude, it failed to push products ahead of crude, “as the underlying product demand numbers from the reports remained very weak, in particular, gasoline demand,” Zhang said. “According to another DOE report, the US has become a net product exporter in 2011 for the first time in many decades, pointing to a structural shift in US oil demand after the 2008-09 recession and stubbornly high oil prices.”

Zhang said, “Looking through the angle of fundamentals in the physical oil market, we see the market increasingly dominated by poor refining economics and a soft oil product market. The oil market will have to rely on more bullish news around geopolitics and macroeconomic data to move another leg up. High oil prices have already pushed the Euro-Zone’s inflation higher than expected, while the Federal Reserve chairman also expressed concerns that the high gasoline price would put upward pressure on US inflation. 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. Meanwhile, we continue to see the current market as a good producer hedging opportunity, on high swap prices and low volatility.”

Moreover, he said, “A price spike on the back of any military action against Iran is likely to be short-lived as it is almost certain that it will be accompanied by a reserve release, and followed by more economic woes globally.

Research analysts at Barclays Capital reported, “Oil has very little spare production capacity globally—well below 2%—and demand, even in a weak global economy, still outstrips supply, based on our analysis. We also believe Asian oil demand is growing at a faster pace than markets are currently pricing in. Our Brent price forecast for 2012 is $115/bbl, rising to $135/bbl in 2015, with the balance of risk to the upside.”

Barclays Capital analysts also reported global LNG trade expanded in 2011, led by strong Asian demand in the aftermath of the Tohoku earthquake. “Liquefaction capacity additions will slow sharply in 2012-13, with regasification capacity outpacing supply additions by a factor of 4:1. This will provide a significant number of new potential destinations for cargoes and we expect LNG prices to remain strong,” they said.

US inventories

The Energy Information Administration reported the withdrawal of 82 bcf of natural gas from US underground storage in the week ended Feb. 14, below the consensus for a 90 bcf withdrawal. That left 2.5 tcf of working gas in storage, up 756 bcf from last year and 780 bcf above the 5-year average

EIA earlier reported commercial US inventories of crude increased 4.2 million bbl to 344.9 million bbl last week, exceeding Wall Street’s consensus for a 1.1 million bbl build. Gasoline stocks were down 1.6 million bbl to 229.9 million bbl, exceeding analysts’ expectations of a 400,000 bbl draw. Distillate fuel inventories dropped 2.1 million bbl to 141.4 million bbl, more than the expected 800,000 bbl decline.

Energy prices

The April and March contracts for benchmark US sweet, light crudes each gained 52¢ to close at $107.07/bbl and 107.52/bbl, respectively, Feb. 29 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was up 77¢ and back in step with the front-month futures price of $107.07/bbl.

Heating oil for March delivery declined 3.58¢ to $3.19/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.22¢ but closed essentially unchanged at a rounded $3.04/gal.

The April natural gas contract gained 9.7¢ to $2.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.4¢, closing virtually unchanged at a rounded $2.43/MMbtu.

In London, the April IPE contract for North Sea Brent rose $1.11 to $122.66/bbl. Gas oil for March dropped $19.50 to $1,002.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.47 to $122.26/bbl.

Contact Sam Fletcher at [email protected].