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Oil prices hold steady during week despite rise in US inventories, stronger US dollar

1st May 2010, 12:52 pm Oil prices hold steady during week despite rise in US inventories, stronger US dollar

Crude prices were on the rise at the start of the week, boosted by the US home sales data released the previously Friday, sowing a 27% jump in March. Greece’s decision to ask the European Union and the International Monetary Fund (IMF) to trigger a previously agreed on rescue mechanism also served as a bullish cue for investors. US Securities and Exchange Commission’s (SEC) decision to charge Wall Street’s largest investment bank Goldman Sachs (NYSE: GS) was reported to have been a narrow 3:2 decision produced by a vote along party lines, providing more relief for commodities including oil and gold.

However, the Greek debt situation took a turn to the worse. The debt laden country was forced into its decision to ask for aid after the EU’s stats agency Eurostat revised its 2009 budget deficit from 12.9% of the GDP to 13.6%, causing its bonds to soar to over 13%. Following Greece’s request, Germany said it would only provide money if the country passed economic reforms that would keep the ballooning budget deficit in check. This move made the prospect of a default evermore realistic, causing bond yields to jump to over 20% and triggering more downgrades of Greece’s sovereign rating. Standard & Poor’s cut Greece to junk, while also downgrading Portugal and later Spain to trigger worries that the debt crisis could spread into more euro zone countries.

The negative developments in Europe’s debt crisis further pushed down the euro to boost the US dollar and make dollar-denominated commodities such as crude more expensive for holders of other currencies to dent demand and pressure the prices.

Later in the week the worries eased after Greece announced that it would introduce a large-scale package of austerity measures to satisfy the EU and the IMF and secure a credit line of over €120 billion over three years.

Crude prices were lifted by this week’s inventories report from Energy Information Administration (EIA), which showed a steep drop in gasoline inventories. Rising gas consumption in the US led to a drawdown of 1.24 million barrels, or 3.1%, while an increase was expected. This helped crude shake off yet another rise in oil inventories, which added another 1.96 million barrels. Distillates, which include heating fuel and diesel, increased by nearly 3 million barrels.

Tuesday’s report from the American Petroleum Institute (API) showed an increase of 5.3 million barrels, signalling lower demand.

As a result, oil ended up where it started the week with June Brent Crude holding steady above US$87/barrel, while US light, sweet crude returned back to over US$85/barrel.

Most major oil and gas stocks were in decline this week. BP (LSE: BP) tumbled 10.1% during the week after its rig in the Gulf of Mexico exploded, leading to a massive oil spill that has already reached Louisiana. Fellow supermajor Shell (LSE: RDSB) added 3%, Cairn Energy (LSE: CNE) lost 2.5%, BG Group (LSE: BG) was at about the same level at 1,113 pence and Tullow Oil (LSE: TLW) declined 6.8%.

Oil and gas engineering firm Amec (LSE: AMEC) lost 3.6%, while peer Petrofac (LSE: PFC) declined 3.7%.

Large and Mid Cap News

Petrofac (LSE: PFC) has announced that its Offshore Engineering & Operations business has secured a new contract worth £35 million with Britannia Operator Limited, a 50/50 joint venture between Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP).

Oil and gas engineering group and FTSE 250 constituent Weir Group (LSE: WEIR) has performed better than expected in Q1 with an improvement in activity levels across a number of key markets, leading it to expect H1 profits to be “substantially” ahead of the prior year period.

Oil and gas supermajor BP (LSE: BP) had a strong first quarter, achieving a 135% year-on-year jump in profits to US$5.6 billion due to higher oil prices that have bounced back to nearly US$90/barrel after falling to nearly US$30/barrel last year. The company also updated the markets on its efforts to stop the oil spillage in the Gulf of Mexico following the explosion on a BP-operated rig.

Small Cap News

Petrel Resources (AIM: PET) has cleared the way for its expansion in Iraq, returning its attention to its primary field of expertise – oil exploration. Petrel today announced it has resolved all the outstanding issues in relation to the Subba and Luhais oilfield development, with a new deal struck between Petrel, Makham - its Iraqi partner - and the Iraqi Ministry of Oil.

In its full-year results, Regal Petroleum (AIM: RPT) told investors that it has set a foundation which should provide a stable platform for significant future growth in production and increased revenues. Indeed the company has made strong progress in the 12 months ended 31 December 2009, with a 74% increase in revenue and 136% improvement in gross profit.

Faroe Petroleum (AIM: FPM) is set to raise £69.8 million through a fully underwritten rights issue, and plans to use the proceeds to fund a significant exploration and appraisal programme across its projects in the Atlantic Margin, the North Sea and Norway.

Ascent Resources (AIM: AST) told investors that will now retain a 100% interest in the Cento & Bastiglia exploration permit in the Po Valley of northern Italy, after its joint venture partner,  Otto Energy, withdrew from the project.

Petroceltic International (AIM: PCI) today reported on its progress in the “active and very successful” 2009, highlighting the completion of a drilling programme in Algeria and gas discoveries at its Isarene permit and Ain Tsila Ridge as a result of an intensified exploration activities that resulted in higher operational losses.

The UK Takeover Panel has issued a ‘put-up or shut-up’ ruling in relation to the unsolicited approach for Gulfsands Petroleum (AIM: GPX) made by Oil India Ltd and the Indian Oil Corporation in March. The Panel Executive has ruled that Oil India and Indian Oil must announce a firm intention to make an offer for Gulfsands by 5.00 pm on 11 May 2010, or announce that it does not intend to make an offer.

Xtract Energy (AIM: XTR) said the Sarikiz-3 well at the on-shore Alasehir licence area in Turkey showed no hydrocarbons in recoverable quantiries during testing, and it does not consider the well to be commercial.

Gulfsands Petroleum (AIM: GPX) has reported further progress in Syria, where the company has begun production from the Yousefieh oilfield, and is ready to begin a three-month, three-well, development and appraisal drilling programme at the Khurbet East oilfield.

Solo Oil (AIM: SOLO) has agreed terms for an investment in Reef Resources (TSX-V: REE), through a staged C$1.65m loan facility which will provide Solo with certain revenue sharing arrangements. Reef Resources’ primary asset in Ontario, has estimated proved and probable reserves of 35,533 barrels of oil equivalent (boe) and 159,370 boe respectively. The project is currently shut-in awaiting development financing to take it into production.

Gulfsands Petroleum (AIM: GPX) said it received a fresh, unsolicited, 315p per share approach from Oil India Ltd (BOM: 533106) and Indian Oil Corp (BOM: 530965), on the 27 April 2010. The company rebuffed the unchanged offer, and according to Gulfsands, the board remains unanimously of the view that the proposal is wholly inadequate and materially undervalues the company.

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