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December crude contract expires at low

Sam Fletcher
Senior Writer

The December contract for benchmark US crudes expired Nov. 17 at $55.81/bbl, the lowest closing price in 17 months on the New York Mercantile Exchange, amid calls from some members of the Organization of Petroleum Exporting Countries for another production cut.

The contract had plunged $2.50 to $56.26/bbl Nov. 16, the lowest closing for a front-month oil contract since Nov. 18, 2005. The new front-month January crude contract slipped by 17¢ to $58.81/bbl Nov. 20 but rebounded to $60.17/bbl in the next trading session as strong winds halted tanker loadings in Valdez, Alas., and reduced the flow of crude through the Trans-Alaska Pipeline to 25% of normal capacity.

NYMEX was closed Nov. 23-24 for the US Thanksgiving holiday. But analysts in the Houston office of Raymond James & Associates Inc. reported oil prices were up in other markets Nov. 24 on news of militant attacks on crude supplies in Nigeria, which disrupted production of 60,000 b/d. Eni SPA declared force majeure at Okono-Okpoho offshore oil field. "Nigeria has suffered anywhere between 600,000 to 800,000 b/d loss in production due to the continuous militant attacks that have plagued the oil rich Niger delta," said Raymond analysts. Although crude prices had vacillated in recent weeks, they said, "Continuous geopolitical turmoil provides a support to crude prices near the $60/bbl level."

Earlier, Raymond James analysts said OPEC's call for a second production cut reinforces suspicion that the production cut instigated on Nov. 1 was lower than the announced 1.2 million b/d. Still, Saudi Arabia's oil minister said his country might support another production cut at OPEC's Nov. 14 meeting in Nigeria. Meanwhile, Oil Movements, which tracks tanker operations, said OPEC exports are expected to increase by 150,000 b/d to 24.58 million b/d in the 4 weeks to Dec. 9 after remaining flat during the 4 weeks prior to Nov. 25.

The Nov. 23-26 Thanksgiving holiday had a dual effect on US energy demand. On one hand, it was expected to cut power demand with offices and some businesses closed. However, energy prices had rebounded earlier partially in anticipation of holiday travel. More people travel over the Thanksgiving holiday than any during other US holiday. Some 31.7 million motorists were expected to take to US roads and highways, representing 83% of total travelers expected over the 4-day holiday.

US inventories
The Energy Information Administration said US commercial inventories of crude jumped by 5.1 million bbl to 341.1 million bbl during the week ended Nov. 17. Gasoline stocks increased by 1.4 million bbl to 201.7 million bbl during the same period. Distillate fuel inventories fell by 1.2 million bbl to 133.8 million.

Imports of crude grew by 1 million b/d to 10.5 million b/d in the same week. Input of crude into US refineries increased by 60,000 b/d to 15 million b/d, with refineries operating at 87.1% of capacity.

EIA also reported the withdrawal of 1 bcf of natural gas from US underground storage in the same week, compared with a 5 bcf injection the previous week and a 9 bcf withdrawal during the same period last year. US gas storage now stands at 3.4 tcf, up by 174 bcf from year-ago levels and 240 bcf above the 5-year average.

The latest withdrawal of gas "does not appear to reflect any new incremental 'backed-out' demand or change in our view of the supply-demand fundamentals," said Robert S. Morris, Banc of America Securities LLC, New York. US weather Nov. 1-17 was nearly 10% warmer than the 10-average for that period. Since November accounts for only 15% of a normal winter's heating demand, the month "has historically not been a precursor" for the full winter. "If temperatures for the rest of the winter match the 10-year average, we project that natural gas storage levels will end March at about 1.35 tcf vs. last year's record high [of] 1.7 tcf, and the 5-year average of roughly 1.2 tcf," Morris said.

To accomplish that, however, the pace of gas withdrawals this winter would have to average 13.9 bcfd in November-March vs. 9.9 bcfd last winter, in the face of increased supply relative to the hurricane curtailment of offshore production in 2005 and some increase in "organic" production, he acknowledged.

Raymond James analysts said, "On the natural gas front, prices have held within a 98¢/Mcfe range during [most of] November (with a high of $8.26), after months of intense volatility. Frigid weather is the most likely catalyst needed for oil and gas prices to break out of their respective trading ranges."

(Online Nov. 27, 2006; author's e-mail: samf@ogjonline.com)


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