Commodities: Oil starting to recover on Kuwaiti export freeze

Prices unless otherwise stated are for the close of April 12.

2012 baseload German power: €58.61/MWh, down 0.95%
2012 CIF ARA Coal: €130.92/t, down 0.30%
Front-month UK natural gas: GBp61.22/therm, up 0.00%
EU emission allowances (EUAs) for December 2011 delivery: €16.59/t, down 1.01%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €12.75/t, down 0.93%
Brent crude oil futures for front-month 2010 delivery: US$121.36/bbl, up 0.4%, as of 10:45 GMT, April 13
WTI crude oil futures for front-month 2010 delivery: US$106.56/bbl, up 0.6%, as of 10:45 GMT, April 13

Latest buzz

In perhaps a classic example of a self-fulfilling prophecy, the oil markets were rocked on Tuesday by claims by Goldmans Sachs that the recent rally in oil prices looked over done.

In a research note, the company’s chief energy analyst David Greely said that: “While prices are back at levels of spring 2008, supply-demand fundamentals are significantly less tight… We believe that the market will experience a substantial correction towards our US$105 a barrel near-term target for Brent crude oil in coming months… Both inventories and spare capacity are much higher now and net speculative positions are four times as high as in June 2008.”

The news outweighed OPEC’s decision to raise its forecast for average annual world oil demand in 2011 from 87.74mbpd to 87.94mbpd. The cartel also upwardly revised its data for 2010 to 86.55mbpd, up 2.0mbpd from 2009. It expects the March 11 Japanese earthquake and tsunami, along with the civil war in Libya to have little impact on global demand. Other bullish news included a report from the American Petroleum Institute, which said that crude oil inventories rose by 0.5mbbl, while gasoline and distillate stockpiles dropped by 4.6mbbl and 3.7mbbl, respectively.

In its latest short-term energy outlook, the EIA has said that that it “expects oil markets to tighten over the next two years, given expected robust growth in world oil demand and slow growth in supply from non-OPEC countries. These conditions result in an expected drawdown of global petroleum stocks and a call for increasing production from OPEC member countries, which will reduce surplus crude production capacity at a time when the disruption of crude oil exports from Libya and continuing unrest in other Middle East and North African (MENA) countries already highlight significant supply risks. The agency is expecting the price of WTI to average US$106/bbl in 2011 and US$114/bbl in 2012, up by US$5 and US$9, respectively from March’s outlook.

The IEA has said that Saudi Arabia may have cut output, due to the short-term impact of the crisis in Japan on oil demand. “As a result, Saudi Aramco is though to have throttled back production in mid-March,” the agency said. Reuters puts the reduction in output at 500,000bpd. The IEA estimates that the disaster will cut 2Q11 demand by 270,000bpd, but afterwards, increased use of oil for power generation and reconstruction would compensate for the current decline. The IEA also stated that “if global supply were to chug along at March levels [88.3mbpd] for the rest of 2011,” developed world inventories could approach five-year lows by the end of the year.

US sweet light crude for May delivery fell by US$3.67, or 3.3% to settle at US$106.25/bbl on the NYMEX, its lowest settlement price seen since March 30. ICE Brent crude dropped by US$2.67, or 2.1%, to finish at US$123.98/bbl.

Currently, crude appears to be rebounding, given a temporary halt to Kuwati oil exports due to bad weather and renewed concerns over the fate of Libya.

US natural gas futures fell by US¢1, or 0.2%, to settle at US$4.098/mBtu on the NYMEX, with the Commodity Weather Group predicting normal or above-normal temperatures for the East Coast over the April 12-26 period. Deliveries of natural gas to US power plants have fallen by 0.6% according to Bloomberg as of 15:11h on April 12, to 13.2bnft³. The EIA is expecting marketable US gas production to average 63.32bnft³pd in 2011, up from the 62.29bnft³pd estimated in March and a Bloomberg poll has predicted that 34bnft³ of gas may have been injected into storage in the previous week, compared to a five year average of 28bnft³.

ARA and Richards Bay physical coal prices dropped by US$2-3/t on April 12, pulled lower by the heavy fall in oil prices. However, there are signs that demand is picking up in Asia, with Chinese coal buyers on the hunt for summer supply, with a preference for Indonesian coal. Traders also suspect that while there still remain heavily discounted high-ash Australian coal cargoes, the market might have already bottomed out. Some are predicting that Chinese domestic coal prices could rise by another 5% over the next month, potentially opening the door to higher import volumes.

One development that could potentially have big implications for both the thermal and coking coal markets is a joint venture between the Steel Authority of India (SAIL), Japan’s Kobe Steel and South Korea’s Posco, which is looking to produce steel using thermal coal, via “smelting reactors or smelting reduction process”. Should the venture succeed and the technology adopted on a large scale, then demand for seaborne thermal coal is likely to increase and some of the premium commanded by coking coal could evaporate. The coking coal market has become increasingly volatile in recent months after China banned exports.

EUA futures traded in a wide €16.55-16.85/t range on Tuesday, with traders paying close attention to the German power market. The 2012 baseload power contract dropped by 0.95%, thanks in part to a 0.30% decline in coal prices, which together worked to bring the Dec11 EUA contract down by 1.01% to settle at €16.59/t.

CER prices proved to be more slightly more resilient than their EUA counterparts, despite relying on the EU ETS for direction, with the Dec11 and Dec12 contracts dropping by 0.93% and 1.03%, respectively. As a consequence, the Dec11 and Dec12 CER-EUA spreads narrowed by €0.05 and €0.06, to finish at -€3.84 and -€4.87, respectively. Barclays Capital has upwardly revised its 2013 CER price forecast by €2 to €24, on the back of growing European demand, combined with the introduction of qualitative restriction on CERs from industrial gas destruction projects after 2012, which will reduce the amount of CERs available for use within the EU ETS.