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Brent Crude Oil

Brent Crude rallies past $80 as demand outlook improves, stock markets surge

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Crude prices surged this week, rising above US$81/barrel despite bearish US stockpiles data after benefitting from copper’s rally early in the week and strong gains in equity markets in Europe and the US.

The earthquake that hit the world’s largest copper producer Chile was estimated to have interrupted as much as 5% of global production of the yellow metal, helping commodity markets to gains in defiance of a stronger US dollar.

The positive economic data that came out later in the week, including the ISM (Institute of Supply Management) updates that showed an expansion of the manufacturing and services sectors in the US, Australia’s decision to hike a key interest rate and unexpected drop in Japan's unemployment rate, improved the outlook for crude demand to further support the prices at just below US$80/barrel.

The moves by Greece, which included announcing a fresh package of economic austerity measures to save the debt laden country some €6.8 billion and raising €5 billion in an oversubscribed bond issue, strengthened the euro and pushed down the US dollar, making dollar denominated commodities such as crude cheaper for holders of other currencies to help the demand. Meanwhile, equity markets continued their rally to further improve the outlook for crude demand.

The sentiment was strong enough to shake off inventories updates from API (American Petroleum Institute) and EIA (Energy Information Administration) that were released on Tuesday and Wednesday respectively.

The EIA said that oil stockpiles increased by 4.1 million barrels, which was far ahead of expectations, while gasoline stocks added 700,000 barrels to signal lower demand. Distillate stockpiles that include heating oil dropped 900,000 barrels, though it was a lesser decline than projected.

The update was about in line with data the American Petroleum Institute (API), which reported a 2.7 million barrel increase in oil stocks, while gasoline inventories were up 900,000 barrels, however, distillate inventories fell by 4.1 million barrels, indicating stronger demand.

Crude prices retreated slightly after the update and due to weakness in the markets following Wednesday’s Beige Book survey of regional economic conditions that projected a modest pace of recovery. However, Friday’s non-farm payrolls data that showed a lesser than expected drop in private sector employment drove crude prices up, helping US light, sweet crude hit US$81.50/barrel, while April Brent Crude eclipsed US$80/barrel on the New York Mercantile Exchange.

Oil and gas producers were bullish this week, benefitting from crude’s rally. Supermajors BP (LSE: BP) and Shell (LSE: RDSB) were on the rise, while fellow FTSE 100 constituents BG Group (LSE: BG), Cairn Energy (LSE: CNE) and Tullow Oil (SLE: TLW) followed. However, oil and gas engineering firms were weaker as Amec (LSE: AMEC) posted a weekly decline after reporting on its full year results and peer Petrofac (LSE: PFC), which announced a demerger of Petrofac Energy Developments Limited from the group this week, posted a small gain after falling late in the week.

Large and Mid Cap News

Petrofac (LSE: PFC) intends to demerge its UK Continental Shelf assets from its Energy Developments unit, and combine them with Lundin Petroleum’s (OMX: LUPE) UK Continental Shelf oil and gas assets, to form a new company called EnQuest.

Small Cap News

Xtract Energy’s (AIM: XTR) 50%-owned joint venture Extrem Energy AS plans to spud the Menekselik-1 well in April. The new prospect is located on the Siraseki licence in Turkey. The well is targeting the Aslantis sandstones which were identified from the results of recent seismic and geochemical surveys.

Xcite Energy Ltd (TSX-V, LSE-AIM: XEL), a developer of heavy oil assets in the UK North Sea, said its subsidiary Xcite Energy Resources Ltd has signed a legally binding agreement with Challenger Minerals (North Sea) Lrd for CMNS to farm in to the Bentley field, commencing with the forthcoming 9/3b-R well intended to be drilled this summer.

Leni Gas & Oil (AIM: LGO) has decided to divest its Hungarian assets. As a result of the company’s on-going reserves and resource review, the investments in the ZalaGasCo and PetroHungaria ventures are now considered non-core. According to LGO, the decision enables it to divert additional capital resources to its core operations and accelerate its exploration plans.

Petroceltic International (AIM: PCI) expects to convert its hydrocarbon contingent resources into bookable recoverable reserves with its drilling programme that is set to commence this year across its permits in Algeria, Italy and Tunisia.

Caza Oil & Gas (AIM: CAZA, TSX: CAZA) has contracted Patterson-UTI Energy Inc to drill the Matthys-McMillan Gas Unit #2 development well in the Wharton West Wilcox field in Texas, a direct offset to Caza's Matthys-McMillan Gas Unit #1 well that was completed by Caza in July 2007 and has produced approximately 2.4 bcfge (billion cubic feet of gas equivalent) to date.

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