Closure of Strait of Hormuz

Energy analysts say even a partial closure of the Strait of Hormuz could raise the world price of oil within days by $50 a barrel or more, and that would quickly push the price of a gallon of regular gasoline to well over $4 a gallon.

“You would get an international reaction that would not only be high, but irrationally high.” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation.

Just the threat of such a development has helped keep oil prices above $100 a barrel in recent weeks despite a return of Libyan oil to world markets, worries of a European economic downturn and weakening American gasoline demand.

Both Brent and WTI oil prices rose slightly on Thursday as the political tensions intensified.

US and China Alliance

Analysts say that a crisis over the Strait of Hormuz would most likely bring China and the United States into something of an alliance to restore shipments, although Mr. Goldwyn said China would more likely resort to private diplomacy instead of military force.

Europe and the United States would probably feel the least direct impact because they have strategic oil reserves and could get some Persian Gulf oil through Red Sea pipelines. Saudi Arabia has pipelines that could transport about five million barrels out of the region, while Iraq and the United Arab Emirates also have pipelines with large capacities.

But transportation costs would be higher if the strait were blocked, and several million barrels of oil exports would remain stranded, sending oil prices soaring.

Oil Price Forecast – 2013

The bank forecasts the price of Europe’s Brent oil for 2013 to average out at $121.25 per barrel and forecasts the 2013 average WTI oil price at $114.25 per barrel.

“Our analysis suggests that supply constraints will again be reached by the end of 2013, driving a quarterly rise in our ICE Brent price forecast to $130 per barel.” it said.

Oil Price Forecast – 2012

JP Morgan has maintained its price projection of $115 a barrel for Brent crude oil, and $97.50 a barrel for WTI through 2012.

Earlier this week, Goldman Sachs cut its 2012 Brent crude oil price forecast, on growing worries that the European financial crisis would restrain economic growth and curb global fuel demand.

Goldman Sachs trimmed its 2012 Brent oil price estimate to $120 a barrel from $130 and cut its forecast for US WTI crude oil price to $109 from $123.50.

Goldman Sachs had the highest Brent 2012 forecast of $130 a barrel a recent monthly oil poll, well above an average of $106.80 a barrel expected in 2012.

JP Morgan – Top Oil Stock Picks

Meanwhile, JP Morgan has adopted a more positive stance toward the major US oil producers sector, while also upgrading several stocks within the sector in a research note released on Thursday.

Within the integrated oils sector, JP Morgan’s top picks are Nexen, Hess, Talisman Energy and Occidental Petroleum. The bank’s analysts think these companies offer the most attractive combinations of upside to price targets, downside protection, upcoming catalysts and growth in production.

“We stress that we would not short these names, but we would lock in recent outperformance, as we believe they have less to offer than the peers in terms of share price performance, underlying growth and valuations appeal in the near term.” the report said.

Latest Brent Oil Price

In London, Brent crude oil futures for November 2011 delivery was trading at $105.93 a barrel, 06.20 GMT on the ICE Futures Exchange. Brent fell 4.5 percent yesterday and closed at $105.43.

Stock Markets

Markets across Europe shared the gloom, with the German Dax losing 4.9 percent and France’s Cac falling by 5.2 percent. Wall Street was also bathed in red, with the Dow Jones down 444 points, or 3.99 percent, by early afternoon in New York.

London’s leading shares index is braced for another rocky day after panic over the state of the global economy triggered its biggest fall in nearly three years.

The slump – the biggest points fall since November 2008 – came after the US Fed delivered a gloomy view of the economy and failed to inspire traders with its latest emergency measures.

“The future is so uncertain. The world could look significantly different in a month’s time. Greece could have defaulted, we could be in the middle of a banking crisis, a bank could have even gone bust.” said Louise Cooper, markets analyst at BGC Partners.

Latest WTI Oil Price

US Light crude oil futures for November 2011 delivery was trading at $80.59 a barrel, 06.00 GMT this morning in electronic trading on the NYMEX. The US contract closed yesterday’s session down 6.2 percent at $80.51.

Highs and Lows

Just a week after NYMEX oil WTI prices hit a one month high, they are now hitting a one month low, with a 10 percent swing in between. US Light crude oil futures are now back down in the price range last seen in the autumn of 2010.

The ICE US Dollar Index contributed to the steep fall in oil prices as currency traders sold the euro and piled back into the dollar, still seen by many as a safe haven currency, of sorts. A strong US dollar drives oil prices lower, as dollar denominated commodities becomes more expensive for buyers using other currencies.

“We’re just not seeing any real signs of life out there economically. Traders are heading to higher ground. There is just a lot of doom and gloom out there in the markets.” said Rob Kurzatkowski, futures analyst with OptionsXpress.

Stock Markets

Stock markets tumbled on in trading yesterday as investors took fright at a gloomy warning about the world economic outlook from the US central bank. In Asia, the Nikkei closed down 2.1 percent, Hong Kong’s Hang Seng tumbled 4.9 percent and the Jakarta stock market lost nearly 9 percent. Asian markets continue to look negative this morning.

Latest Brent Oil Price

In London, Brent crude oil futures for November 2011 delivery were trading at $108.57 a barrel, 08.05 GMT this morning in electronic trading on the ICE Futures Exchange.

Stock Markets Sell Off

On Asian stock markets, Japan’s Nikkei 225 slumped 1.6 percent to 8,598.32 and South Korea’s Kospi slid 2.6 percent to 1,806.62. Hong Kong’s Hang Seng dived 3.6 percent to 18,138.32. Australia’s S&P/ASX 200 was 2.2 percent down at 3,984.40.

European stock markets also opened lower this morning. London’s FTSE 100 Index slipped 2.6 percent to 5154.97, the DAX in Frankfurt was 3.2 percent lower at 5251.88 and the CAC-40 in Paris fell 2.7 percent to 2857.41.

“Oil seems to have fallen in line with equity markets. Prices shouldn’t have fallen so low, based on just oil fundamentals.” said Tony Nunan, a risk manager with Tokyo based Mitsubishi.

Meanwhile, the US dollar surged to a seven month high against major currencies after the latest moves by the US Fed boosted the dollar.

Federal Reserve policy makers indicated they are willing to do more to keep the American economy from sliding into another recession as they made their second move in as many months to reduce borrowing costs.

A firmer dollar makes crude oil more expensive for holders of foreign currencies and tends to weigh on oil prices.

Latest WTI Oil Price

US Light crude oil futures for November 2011 delivery was trading at $84.24 a barrel, 07.40 GMT this morning in electronic trading on the NYMEX. The contract closed yesterday’s session down 1.15 percent, at $85.92.

US Oil Stocks

Oil prices had risen in earlier trade after government data showed US crude oil inventories last week dropped 7.3 million barrels, a far steeper fall than the 0.9 million barrels expected and the biggest drop since December, suggesting that American supplies remain tight.

US Dollar Index Gains

The US dollar has once again strengthened on speculation the US Federal Reserve announced further stimulus for the American economy that won’t debase the currency.

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 78.490, up from yesterday’s close of 77.859.

“The dollar has been undermined by quantitative easing because it has caused a huge drop in short term yields. This time round it could drive shorter dated yields higher, which at the margin is likely to be dollar positive.” said Kit Juckes, head of foreign exchange research in London at Societe Generale SA.

The Dollar Index fell 3.9 percent from November through to June 2011, during the US Fed’s last round of quantitative easing.

Latest Brent Oil Price

In London, Brent crude oil futures for November 2011 delivery was trading at $109.11 a barrel, 07.00 GMT this morning on the ICE Futures Exchange. Brent fell with stock markets yesterday, closing 2.6 percent lower at $109.27.

Italy Downgrade

Standard and Poor’s cut Italy’s government debt rating to A from A+ and said Italy’s economic growth prospects were getting weaker, with planned reforms by the Italian government not expected to help much.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.” S&P said in a statement.

Italy follows eurozone partners Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

Meanwhile, Asian stock markets extended losses as news of Italy’s credit rating downgrade prompted heavy selling in financials and exporters shares across the region.

“Standard and Poor’s surprise downgrade on Italy will likely add to concerns of contagion in the eurozone debt crisis.” noted United Overseas Bank analysts.

Both Brent and WTI oil prices have been tracking stock markets this month as the Euro debt situation evolves into something which could spiral out of control.

Latest WTI Oil Price

US Light crude oil futures for November 2011 delivery was trading at $85.68 a barrel, 06.45 GMT this morning in electronic trading on the NYMEX. The contract closed yesterday’s session down 2.6 percent at $86.04.

Greek Concerns

The Greek government has been warned it must forge ahead with hardline spending cuts to secure the crucial next tranche of its international bail out funding. The country is facing demands to sack 100,000 public sector workers, 20,000 more than anticipated to curb its massive borrowing levels.

But the Greek government has claimed that the country is being “blackmailed and humiliated” as it struggles to get a grip on the crisis.

World stock markets fell again yesterday, with oil prices and the euro also down, after fresh worries that Greece could default on its debt repayments.

“Look at what’s happening in Europe. People are beginning to see that it is taking a lot longer than anticipated to resolve the issue. Longer uncertainty means the demand outlook for oil remains weak.” said Oil analyst Jonathan Barratt of Commodity Broking Services.

Latest Brent Oil Price

In London, Brent crude oil futures for November 2011 delivery was trading at $111.47 a barrel, 06.45 GMT this morning on the ICE Futures Exchange.

Both Brent and WTI oil futures have recently been tracking stock markets higher and lower, with EU debt concerns remaining the main driver.

Asian Markets Lower

Asian stock markets fell on Monday after European finance heads failed to agree a plan to solve the region’s debt concerns, while they also put off a decision on releasing rescue funds to Greece.

Asian markets had rallied before the meeting on Friday after the ECB and its US, Japanese, Swiss and British counterparts offered to inject US dollars into lenders squeezed by Europe’s debt crisis.

“Any improvement in sentiment following the US dollar liquidity announcement by various central banks last week is already filtering away against the background of EU officials failure to make any headway over the weekend.” according to client comments by Credit Agricole.

The Shanghai Composite was down 1.4 percent while the Hang Seng fell 2.1 percent at the time of writing. The Sensex declined 0.6 percent while Sydney fell 1.5 percent.

Added to negative sentiment was Moody’s pessimistic take on Italy’s austerity package. The ratings agency said the plan was “credit negative” for the country’s regional and local governments as it added pressure on already stretched local budgets.

“Europe will be a pessimistic weight around the crude oil market for some time.” said David Lennox, a resource analyst at Fat Prophets, Sydney.

Latest WTI oil price

US Light crude oil futures for October 2011 delivery was trading at $86.64 a barrel, 06.30 GMT this morning in electronic trading on the NYMEX. The October WTI futures contract expires later today.

EU Debt Fears Boost the US Dollar

The euro has weakened this month amid growing fears that a possible debt default in Greece could trigger similar moves in Portugal, Ireland, Italy and Spain as well as a banking crisis.

The euro fell to $1.3666 on Monday from $1.3794 on late Friday.

Meanwhile, the ICE US Dollar Index, which tracks the US dollar against six major world currencies rocketed north to 77.690. A stronger US dollar makes commodities such as oil futures more expensive for buyers using other currencies.

“The euro will be proceeding through a renewed weakening phase that will be placing additional pressures on the oil market.” energy consultant Ritterbusch and Associates said in a report.

Market sentiment improved late last week when major central banks, inluding the US Fed and the ECB threw a lifeline to European banks heavily exposed to Greece, offering them unlimited three month US dollar liquidity.

But that glow is off as weekend meetings of European finance ministers in Wroclaw, Poland, only served to underscore deep divisions on the EU debt crisis.

Brent Oil Futures – Closing Price

ICE Brent crude oil futures for November 2011 delivery ended the week’s trading session at $112.12 a barrel on the ICE Futures Exchange, $0.44 lower than last week’s closing price of $112.56 a barrel.

European Debt Concerns

A weakened global economy would drive oil prices lower and the lack of a certainty about European debt has been pressuring the energy sector. Europe consumes about 18 percent of all crude oil produced globally.

In a meeting on Friday, European leaders confirmed they want to postpone a decision on more Greek bailout moeny until October.

Yesterday’s delay was yet another example of Europe’s halting effort over almost two years to solve its difficulties over too much government debt in some European countries of which Greece and Italy are the debt stars.

Stock markets have been extremely volatile in recent weeks on concerns about the crisis, but barely moved on news from the meeting as expectations were already low.

EU Debt Concern Drives US Dollar Higher

Fears that Greece might not get more rescue money and default have made Greek bond prices plummet, weighed on the euro’s foreign exchange rate and pushing the US dollar higher.

The ICE US Dollar Index, which tracks the US dollar against six major world currencies ended the week strong at 76.593.

Meanwhile, rumours and speculation by public officials about Greece defaulting or leaving the euro have helped keep the sense of crisis alive and well.

“‘Rumours, leaks and comments that bring into question the decisions of 21st July and Greece’s actions regarding these decisions are harmful, not only for Greece but for the eurozone as a whole, and the international economy.” said Greek Finance Minister Vangelos Venizelos.

“It seems as if the solutions in Europe are being pieced together with gum and could very easily come apart.” said Desiree Soulodre, trader at brokerage BCI Corredor de Bolsa.

Brent Crude Pricing

As much as 70 percent of the world’s physical crude is priced off the Brent benchmark, called Dated Brent by traders. It also underpins the futures market, which companies use to hedge oil price risks and investors use to bet on the future price of oil.

But the flow of crude from the aging North Sea oil fields that form the basis of the Brent benchmark has dwindled in recent years. The lack of liquidity has increased the risk of manipulation, with traders sometimes able to squeeze the market and bid up the price of Brent by buying up all available cargoes.

Temporary factors in the region have also tightened the market. Last month, the North Sea Forties pipeline was shut down after an unexploded German mine from World War II was discovered nearby. That led to delays and cancellations of shipments of Forties, the largest grade of crude contributing to Brent.

Such supply problems have contributed to a big increase in the gap between the prices of Brent and US WTI futures, with the premium reaching a record $27 a barrel earlier this month. Brent crude futures were trading at $112 a barrel Friday while WTI was at only $88 at barrel.

Platts Brent Price Revisions

Platts assesses the price of Brent by looking at contracts from 10 days to 21 days before the oil is loaded for delivery. That 12 day period will be expanded to 16 days, beginning on 6th January 2012.

Platts said adding four more delivery days would allow the assessment process to potentially capture more than 30 percent of additional supply, which would create greater liquidity for the benchmark.

Jorge Montepeque, Platts’s global director of markets reporting, said that in the longer term, the company was considering extending the date range further. It was also mulling adding other grades to increase Brent’s liquidity, from the North Sea and beyond.

The changes are important for companies such as oil producers and refiners which hedge their exposure to the physical oil market through futures and options. If the price of the physical Brent differs from Brent derivatives because the use of different methodologies, their hedging strategies could fail.

Royal Dutch Shell, one of the biggest participants on the Brent market, took the rare step of sending a public letter to Platts last month urging the pricing agency to delay any change. In the letter, the oil company, said that the adjustments in the physical and derivatives Brent contracts should be concurrent and said they should not be implemented until the first quarter of 2013.

Other industry participants took the same view, urging Platts to delay the overhaul, executives said. Some traders, however, took the view that Platts needed to move quickly and ICE was the one that should accelerate its plans to alter the methodology of the Brent futures contract.

“We believe these changes are necessary to maintain the quality of the Brent price assessment. Recent events in the market, including disruptions to the Forties pipeline system and shortfalls in cargo deliveries, show clearly that timely action is needed to maintain the strength of the physical benchmark. Four more delivery days will allow the assessment process to potentially capture more than 30% of additional supply.” said Dan Tanz, vice president of editorial, Platts.

For more information and background on the pending changes, Platts has posted a webinar on the proposed changes to its Dated Brent and cash Brent assessments on its website. The webinar is available for download at the following link: Platts Oil Price Changes 2012

WTI Oil Futures – Closing Price

US Light crude oil futures for October 2011 delivery ended the week’s trading session at $87.96 a barrel on the NYMEX, closing $0.77 higher than last week’s Friday close of $87.19 a barrel.

Lower trading volumes and traders closing out positions ahead of the weekend made for a volatile session on Friday, with WTI oil prices down as much as 2.6 percent at one point.

Greece Loan Delayed

Yesterday, EU finance ministers decided to delay an eight billion euro bailout loan for Greece until they had firmer evidence of Athens’s willingness to cut its deficit. Without the extra funding, observers say Athens will default on its debt.

EU officials and IMF representatives have been visiting Greece on a regular basis to check on the process of government spending cuts before the next loans are released.

“I think the real key worry for the oil markets is that we’re heading into another downturn. It’s a very legitimate worry.” said Bill O’Grady, the chief market strategist at Confluence Investment Management.

Worries that Greece might default on its loan payments have driven much of the recent turbulence in financial markets.

Oil prices have recently been tracking stock markets higher and lower as traders and investors are concerned that oil prices could fall much lower if the world falls back into another big recession, denting crude oil demand.