WT Research
All posts from WT Research
WT Research in WhoTrades Research,

Cyprus crisis pressures oil prices all week

Brent crude traded back above USD 109/bbl on Monday, with oil prices under pressure from falling stocks and a stronger dollar amid a proposal that Cyprus would tax depositors as part of its bailout plan. This sparked fears of a run on some banks in the region, driving down the euro and other riskier assets, including such base commodities as oil. The proposal sent shock waves across financial markets, and it has created the fear that a reaction in other peripheral eurozone countries could hit the whole banking sector in Europe. Cypriot ministers were working to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island's financial rescue or could lead to its default, with reverberations across the euro zone.

However, a series of recent positive numbers from the world's top oil consumer the US and worries over supply disruption helped stem further losses in oil.

Brent futures dipped 42 cents to USD 109.40/bbl, after testing levels below USD 108/bbl in early trading. WTI recovered from a more than a 1% slide to trade at USD 93.71/bbl, up 26 cents.

Cypriot ministers were trying on Monday to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island's financial rescue or could lead to its default, with reverberations across the Eurozone.

Further losses in oil were capped by expectations of a steady revival in demand growth from the US, and comments from Saudi Arabia's top energy official that oil prices near current levels won't hurt the economy. Nearly all US states began 2013 with lower unemployment rates than they had at the start of 2012, according to Labor Department data. Further losses in oil were capped by expectations of a steady revival in demand growth from the United States.

Worries of an escalation in a standoff between the West and Iran over Tehran's disputed nuclear program also prevented prices from falling much further. Concerns of supply disruption from the Middle East have kept Brent above USD 100/bbl through most of 2012 and so far this year.

Manufacturing output bounced back stateside in February in the latest signal of strength in an economy that is showing clear momentum. Factory production increased 0.8% last month after falling 0.3% in January, the Federal Reserve said. This metric came in twice as much as the consensus figure.

Oil price fell on Tuesday as Cyprus lawmakers rejected a levy on bank deposits under a bailout plan for its distressed banking system amid renewed worries about European debt problems.

April WTI slid USD 1.58 to close at USD 92.16/bbl on the NYMEX. Brent dropped USD 2.06 to end at USD 107.45/bbl on the ICE Futures exchange in London.

Energy market investors were left hanging about developments in Cyprus, where lawmakers rejected a plan to tax bank accounts to stabilize the country's financial sector and clear the way for a massive international bailout. That has prompted fears of a run on banks across Europe, with accountholders questioning guarantees on their savings..

Meanwhile, the economic news in the US helped offset the gloom and doom from Cyprus. The Commerce Department said new homes grew at a seasonally adjusted annual rate of 917,000, up from 910,000 in January and the second-fastest pace in 4.5 years. Building permits also increased in February, rising by 4.6% to 946,000, the strongest showing since June 2008.

An upturn in the US economy is likely to boost demand for oil gas, but the country's supplies remain high. US oil production, at more than 7 mn bpd, the highest level in 20 years. The mid-week inventory on Wednesday is expected to report an increase of 2 mn bbl of crude oil supplies and a drop of 2.5 mn bbl in gasoline stocks, according to the median forecast.

Brent crude oil rose above USD 108/bbl on Wednesday, off a 3-month low, after the Fed Reserve signaled it would continue its stimulus programs and on optimism that European policymakers can rein in the Cypriot debt crisis. The Fed wrapped up a 2-day meeting by pressing forward with its aggressive efforts to stimulate the US economy, saying it would factor in the risks stemming from its policies and also progress in bringing down unemployment.

Talks were held in Moscow between Cyprus and Russia to avoid a financial meltdown, after the island nation’s parliament rejected the terms of a European Union bailout, raising the risk of default and a bank crash. Brent futures rose USD 1.27 to settle at USD 108.72/bbl, down nearly 2 % to a 3-month low on Tuesday. By contrast, WTI rose 80 cents to USD 92.96/bbl.

Oil prices also found support after the EIA reported that crude stocks fell by 1.3 mn bbl last week, confounding the forecasts of a 2.0 mn-bbl build. The report also showed drawdowns in US gasoline and distillate fuel stocks, albeit smaller than expected.

The uncertainty about Cyprus's finances has revived concern about the stability of the euro zone and of the downside risks to global economic growth.

While uncertainty persists over the Cyprus crisis, support came as the US dollar weakened by 0.3% against a basket of foreign currencies. A weaker dollar helps props up price of oil and other dollar-denominated commodities.

Crude oil slid below USD 108/bbl on Thursday as Cyprus struggled to raise enough funds to qualify for a bailout and stave off a banking collapse, renewing concerns over the outlook for petroleum demand in Europe.

The ECB has given Cyprus until Monday to raise EUR 5.8 bln to clinch an international bailout or face losing emergency funds for its banks and their subsequent collapse. Needless to say, the Cyprus factor has been weighing heavily on oil prices.

Alongside worries about Europe, the Eurozone's economic downturn has deepened in March - even before the Cyprus crisis became acute - data from survey compiler Markit showed. The problems in Europe and the precarious situation in Cyprus countered support from more positive economic data from the US, where existing home sales and leading economic indicators rose last month.

In the upshot, May WTI futures delivery declined USD 1.05 to settle at USD 92.45/bbl, while May Brent futures fell USD 1.25 to end the session at USD 107.47/bbl.

Cyprus is considering nationalizing pension funds and is keeping banks shut until Tuesday after it rejected a bank deposit tax required by a European Union bailout and turned to Russia for aid.

Eurozone manufacturing data showed a deepening downturn in the currency bloc, reinforcing negative market sentiment. Flash Eurozone manufacturing showed unexpected declines in March, driven by surprise weakness in the German and especially French purchasing managers' indices (PMI).

The Flash Eurozone Composite Purchasing Managers' Index fell to 46.5 in March, lower than all forecasts in a Reuters poll of 23 economists.

Stronger data stateside did little to reassure investors. The number of Americans filing new claims for jobless benefits inched higher last week, but a trend reading dropped to its lowest in five years.

Business conditions in the U.S. Mid-Atlantic region rose to the highest level since September, according to a survey from the Federal Reserve Bank of Philadelphia and US housing market data also pointed to a recovery.

Chinese data was also supporive, as better-than-expected Chinese manufacturing figures pointed to an improved fuel demand outlook in the world's second-largest oil user. In China, the HSBC Purchasing Managers' Index for March rose to 51.7 in March, up from 50.4 in February, but remained below a two-year high of 52.3 reached at the beginning of the year.

Brent crude edged higher on Friday while US crude futures jumped more than USD 1/bbl.

Oil found broadly found support from equity markets as investors mulled the possibility of a deal to bail out Cyprus, analysts said.

Brent crude for May delivery rose 19 cents to settle at USD 107.66 a barrel on the day. For the week, the contract lost USD 2.16/bbl. May WTI traded up USD 1.26 to settle at USD 93.71/bbl, up 26 cents on the week.

Brent's premium to WTI narrowed sharply, however, off nearly a USD 1 to below USD 14/bbl.

Market watchers have been monitoring pipeline projects, including Magellan's Longhorn pipeline, which is coming online to ease the glut of crude at Cushing. It should also be noted that North Sea crude supplies are on the rise, a factor weighing on the price of Brent crude.

Moving forward, with uncertainty out of the way after an overnight deal was struck between Cyprus and the troika and approved by EU ministers, we think today will see a relief rally, with Brent and WTI likely to gain 1-1.5%.