Commodities: fears of lingering Egyptian unrest push oil prices up, Russia oil production expected to retreat in 2013

All prices unless otherwise stated are for the close of February 10.
2012 baseload German power: €51.55/MWh, up 0.59%
2012 CIF ARA Coal: €116.23/t, down 0.24%
Front-month UK natural gas: GBp53.00/therm, down 0.09%
EU emission allowances (EUAs) for December 2011 delivery: €14.69/t, up 0.07%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.24/t, up 0.27%
Brent crude oil futures for front-month 2010 delivery: US$101.67/bbl, up 0.8% as of GMT 09:00, February 11
WTI crude oil futures for front-month 2010 delivery: US$87.61/bbl, up 1.0%, as of GMT 09:00 February 11

Latest buzz

The tumultuous situation in Egypt, which has left even the US government wrong-footed, has provided fresh impetus to oil prices, with President Hosni Mubarak’s refusal to step down before elections in September suggesting that the current instability may linger on. In a speech broadcast late Thursday after rumours of his imminent departure, Mubarak insisted on remaining in his position and vowed to reject foreign pressure. Some addition strength came from false rumours that Saudi Arabia’s king, Abdullah bin Abul-Aziz, had died after suffering from a heart attack on Wednesday. Brent Crude fell by 0.93% to settle at US$100.87/bll on the ICE futures exchange.

Some have argued that geopolitical risk is putting around a US$20/bbl premium on the price of Brent Crude, although the commodity is also getting strength from signs of strong oil demand growth in China, despite tighter monetary policy and data suggesting that the economic recovery in the US is gathering momentum.  The Labor department reported that initial jobless claims fell by 36,000 in the week ended February 5, to 383,000. The spread between WTI and Brent Crude, briefly hit a new record of US$16 during intraday trading. The situation has meant that those companies that have used WTI contracts as a means of hedging against higher energy prices have been caught out. The IEA has warned that with “few release valves” that could work to bring down the high level of inventories at Cushing, the unusually high spread “may persist for months to come.”

Analysts at Sanford C Bernstein & CO have released a report, which warns that future growth in Russian oil production is close to “impossible” due to spiralling costs and reliance on mature and depleting reservoirs. The authors of the report, Oswald Clint and Alex Prokofjevs indicate that Russian output rose by 2% to around 10mbpd in 2010, mostly due to OAO Rosneft’s Vankor field. They expect output to rise through 2012 and then begin to decline from 2013, with growth of 0.6% expected for this year.

“Only major tax reform could alter this view though none of the companies appear to be shifting their portfolios in a direction which suggests it is imminent.”

US natural gas for March delivery fell on Thursday, despite the EIA reporting a slightly larger than expected withdrawal from storage for the week ended February 4. Inventories dropped by 209bnft³, compared to the 203-206bnft³ forecast by a Platts poll. The contract fell by US¢5.8, or 1.4%, to settle at US$3.986/mBtu. The market appears to have placed the large withdrawal in the context of the imminent end to the heating season and the fact that the current winter has not done enough to bring inventories down to the point where higher prices are justified. The situation also draws attention to the widespread belief that the current high levels of US gas production will persist over the coming year, despite the negative pressure from low prices.

Prompt Physical coal prices saw little movement yesterday, with a small and short-lived US$1/t spike seen after the erroneous news regarding the Saudi king was released. Prices remain in a US$115-118/t range, but utilities and traders are predicting weaker prices in the short to mid-term, due to a lack of demand in both the Atlantic and Pacific markets. Some Indian buyers have returned to the market, spurred by a fall in Richards Bay prices to US$113-114/t FOB, earlier this week, but this is not thought to be sufficient to stem the decline, particularly as there are signs that much of the supply disruptions affecting shipments from Australia, Colombia, Indonesia and Russia have eased.

EUAs saw little movement on Thursday, with the Dec11 contract trading in a tight €0.10 range. The UK government’s auction of 4.4m EUAs cleared at €14.36/t, with a bid/cover ration of 6.77. Although the price was hardly a positive signal for traders, the contract advanced, before hitting resistance at €14.75/t, at which point it began to fall, eventually finishing at €14.69/t. Support came from a 0.59% rise in the value of the 2012 German baseload contract, which in turn received a boost from higher international coal prices.

CERS outperformed EUAs, with the Dec11 contract rising by 0.27%, to settle at €11.24. As a consequence the Dec11 and Dec12 CER-EUA spreads both shrunk by €0.02 to finish at -€3.45 and -€4.16, respectively. Interest in the Dec11 contract fell markedly, and it sunk to being the third most traded contract, after Dec12 and Mar13 futures.