After a warm November that undercut demand, energy prices rallied in early December on indications of sustained US economic growth and predictions for below-normal temperatures in key markets through at least midmonth.
AccuWeather Inc. predicted a "mother lode" of arctic air would trigger "some of the most widespread cold ever" during December. As a result, heating demand in the Northeast US is expected to be 18% above normal.
"In November, the energy market hosted a battle between short-term weather speculators selling off on the unusually warm November climate and longer-term, rational investors buying in behind strong energy fundamentals and the high probability of a return to normal winter weather," said analysts Dec. 5 in the Houston office of Raymond James & Associates Inc. "For the upcoming week, true winter weather is forecast to show up in a big way. Specifically, next week's weather is forecast to arrive not only 32.5% colder than what we experienced this past week, but it also marks the first week where the weather is forecast to be [17%] colder vs. normal."
Spurred by such predictions, the January contract for benchmark US light, sweet crudes jumped by 85¢ to $59.32/bbl Dec. 2 on the New York Mercantile Exchange and by the same amount to $59.33/bbl on the US spot market. The January natural gas contract advanced for the fourth consecutive trading session on NYMEX, escalating by 90.4¢ to $13.93/MMbtu Dec. 2, "a gain of nearly 20% since Thanksgiving on extreme cold weather forecast for this week and speculators again covering short positions," said analysts at Enerfax Daily.
The Energy Information Administration said commercial US crude inventories fell by 4.2 million bbl to 317.6 million bbl in the week ended Nov. 25 (OGJ Online, Nov. 30, 2005). Gasoline stocks dipped by 500,000 bbl to 199.9 million bbl, but distillate fuel inventories jumped by 3.4 million bbl to 127.9 million bbl. In the 4 weeks through Nov. 25, US gasoline demand averaged 9.2 million b/d, up by 2.1% from October figures and 1.3% from the same time last year.
Weather drives markets
"The variable that continues to have the greatest impact on commodity prices . . . is temperatures, both in the US and Europe," said Robert S. Morris, Banc of America Securities LLC, New York. He noted "a 1.5% increase in West Texas Intermediate spot crude oil prices and a more than 15% surge in the 12-region average composite spot natural gas price" during the week ended Dec. 2.
"Despite the well-supplied market, weather appears to be firmly in the driver's seat, moving natural gas prices higher or lower with every change in the weather forecast," said Ronald J. Barone, UBS Securities LLC, New York.
Raymond James analysts expect the weather to continue to drive the market. "Luckily for energy investors, the current weather forecasts are calling for both colder near-term and overall winter weather," they said. "Additionally, independent of weather, we remain convinced that the underlying energy supply-demand fundamentals support healthy commodity prices and longer-term price appreciation for energy stocks."
Morris said, moreover, there is "still a lot of uncertainty" about the amounts of natural gas shut in and the cumulative production lost in federal and state waters of the Gulf of Mexico and onshore along the Gulf Coast, as well as "demand destruction" in the wake of Hurricanes Katrina and Rita. As a result, he said, "Consensus expectations for natural gas prices for 2006 might also be too low, depending on winter temperatures."
The US Minerals Management Service said 132 production platforms in federal waters of the gulf were still without crews Dec. 6, with 509,270 b/d of crude and 2.7 bcfd of natural gas still shut in. Cumulative production lost from federal waters Aug. 26-Dec. 6 totaled 98.5 million bbl of crude and 509.4 bcf of natural gas, equivalent to nearly 18% of the annual crude production and almost 14% of the annual gas production from those waters, MMS said.
Joseph Kelliher, chairman of the Federal Energy Regulatory Commission, said 10% colder-than-normal temperatures this winter could double the price effect of lost production, while 10% warmer-than-normal temperatures would offset the loss of gulf natural gas production.
Some expect possible energy shortages this winter. "We think blackouts or brownouts will be a fact of life in many areas this winter, especially the Northeast, said officials at The Thinking Cos. Inc., an energy think tank based in Falmouth, Me. "We believe utilities need to radically change their power mix in order to keep the power on."
(Online Dec. 5, 2005; author's e-mail: firstname.lastname@example.org)