Commodities: OPEC minister admits cartel’s ability to control oil prices is limited

Prices unless otherwise stated are for the close of April 6.

2012 baseload German power: €60.19/MWh, up 0.12%
2012 CIF ARA Coal: €132.50/t, down 0.38%
Front-month UK natural gas: GBp61.59/therm, down 0.20%
EU emission allowances (EUAs) for December 2011 delivery: €17.16/t, up 0.26%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €13.12/t, up 0.37%
Brent crude oil futures for front-month 2010 delivery: US$122.13/bbl, down 0.1%, as of 10:30 GMT, April 7
WTI crude oil futures for front-month 2010 delivery: US$108.93/bbl, up 0.2%, as of 10:30 GMT, April 7

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According to the EIA’s latest “This Week in Petroleum” report, US crude inventories rose by 2mbbl. Crude refinery inputs rose slightly to 14.371mbpd, but are still considerably below the 14.604mbpd seen in the same week of 2010.  Average retail gasoline prices rose to US$3.684/gal, and stockpiles fell by 300,000bbl to 216.7mbbl. Distillate inventories rose by 200,000bbl to 153.5mbbl.

Despite this news, oil futures advanced on Wednesday, with sweet light crude for May delivery climbing by US¢49, or 0.5% to settle at US$108.83/bbl on the NYMEX. ICE Brent crude gained US¢8 to settle at US$122.30/bbl.

One interesting development that could pave the way for higher price rises in future, was an admission by the UAE’s oil minister, Mohammed bin Dhaen al-Hamli that “there is little we [OPEC] can do in terms of price control.” Speaking at an oil conference in Paris, he went on to say that: “International Markets are choosing to ignore market fundamentals and bet on the worst case scenarios.” His comments were echoed by Iraq’s deputy prime minister for energy affairs, Hussain al-Sharistnai.

“All that OPEC can do is provide the market with the oil it needs and it is doing that,” he said.

Such opinions suggest that OPEC is unlikely to act to bring oil prices down through hiking output further and are likely to prove supportive of prices in the short-term. Also speaking at the conference was the IEA’s Didier Houssin, who argued that the current oil market is very different from that seen in 2008, when OPEC spare capacity was less than 2mbpd. He said that it is currently around 4mbpd and global inventories were comfortable, particularly in the US. However, he pointed out that with the refinery maintenance season coming to an end, “Tightness for supplies, especially sweet crudes may be more difficult to manage in the coming months.”

Oil prices have retreated this morning, due to mounting concerns over the potential for demand destruction and a focus on a European Central Bank meeting scheduled for later today. A Reuters poll of analysts has predicted that the bank will boost interests rates by 25 basis points from the current record low of 1.0%. Further negative pressure is coming from the expansion of NATO operations in Libya.

China announced yesterday 5% increases in retail gasoline and diesel prices, which have come into force today, the fourth increase since October. However, the rise in fuel product prices in China is still lagging behind the increase in international crude prices, suggesting that the Chinese central government is attempting to rein in inflation.

US natural gas for May delivery extended its losing streak to a fourth day, settling down US¢8.5, or 2%, to US$4.146/mBtu, a three-week low, suggesting that traders are awaiting the release of EIA inventory data tomorrow. Also weighing on the market is the return to warmer temperatures for much of the country, with Meteorologists at Frontier Weather predicting average or warmer than usual temperatures across the eastern two-thirds of the US to last through to mid-April. A Platts survey has predicted that the EIA will report a 49-53bnft³ withdrawal from storage for the previous week. The Colorado State University Hurricane outlook is predicting an active hurricane season for the Gulf of Mexico, which could provide some support in the months to come. It puts the odds of a major hurricane making landfall at around 47%, compared to an average probability of 30% for the last century.

David Knox, CEO of Santos Ltd, has said that Japanese utilities will likely increase their purchases of LNG by 10% over the next few years, to fill the gap in their energy supply left by the closure of nuclear power plants. Santos and its partners including Total SA are currently building an LNG project in the Australian state of Queensland, which is expected to ship its first cargo in early 2015. It also has a stake in Exxon Mobil’s PNG LNG project in Papua New Guinea, which is due to start exporting LNG in early 2014. Mr Knox and Origin Energy’s CEO Grant King have predicted that Australian LNG exports could triple to 60Mta by 2017 and could possibly hit 100Mta by 2020.

The Dec11 EUA contract spent much of Wednesday trading in a €17.10-17.30/t range, given the absence of clear direction from a somewhat muddled energy complex. The contract eventually settled up 0.23% at €17.16/t, while Dec13 and Dec14 contracts lost 0.31% and 0.48%, respectively, due to expectations that the ECB will increase the eurozone base rate. This means that the premium commanded by the Dec13 contract has fallen by 4.3% to €2.21/t, from an intraday 19-month high of €2.36/t. The EU Commission is currently considering early sales of Phase III EUAs via the European Investment Bank, prior to the establishment of a single, EU-wide, emissions registry. The EIB is expected to sell 300m EUAs from its reserve prior to 2013 with the revenue generated, going to national governments to assist in renewable energy and CCS projects. Currently, although utilities are seeking 2013 carbon credits to allow them to hedge forward sales, there are few traders able to sell them in the volumes required according to Emmanuel Fages of Orbeo.

CER prices rose to a slightly larger extent than their EUA counterparts, causing the Dec11 and Dec12 CER-EUA spreads to narrow by €0.01 to finish at -€4.04 and -€5.11, respectively. The UN climate talks in Bangkok reached an impasse yesterday. After the presentation of an agenda by the G7 and China, aimed at finalising the agreements made last December, Annex I countries have responded by saying that it does not address all the agreements and is seeking to resolve issues too quickly. The US envoy to the talks Todd Stern has warned that a legally-binding treaty is “unworkable” and has argued that national policies should be the primary drivers behind emissions reductions.