MARKET WATCH
Cold-weather demand tightens markets, raises energy prices

Sam Fletcher
Senior Writer

HOUSTON, Nov. 30 -- Energy prices continued to soar Nov. 29 on reports of inventory reductions as cold weather spread across much of the US.

The US Energy Information Administration said commercial crude inventories fell by 300,000 bbl to 340.8 million bbl during the week ended Nov. 24, ending a 4-week build. Gasoline stocks dropped 600,000 bbl to 201.1 million bbl in the same period. Distillate fuel inventories fell for the eighth consecutive week, down 1 million bbl to 132.8 million bbl in the latest period (OGJ Online, Nov. 29, 2006).

"In just 7 weeks, some 90% of the US oil product overhang has disappeared, and inventories have drawn relative to their 5-year average at a rate of over 1 million b/d," said Paul Horsnell at Barclays Capital Inc., London. "Seven weeks ago, the combined build above the 5-year average for just gasoline and diesel combined was 35.4 million bbl, whereas today that combined build stands at just 1.7 million bbl. Heating oil inventories have also fallen relative to the 5-year average, although in general they have spent the whole year describing a very normal pattern from a slightly higher than normal base."

He said, "Heating oil output has been slow to ramp up this year and from this point the race is on between that ramping up of supply and the ramping up of demand as determined by weather."

Weather certainly will be spurring demand as a cold arctic air mass moves eastward and is predicted to hit the East Coast early next week. Temperatures are predicted to plummet into the 20º F. range in Chicago this week and into the 30s next week in New York.

Energy prices also were buoyed by reports that the US dollar is now at a fresh 20-month low vs. the euro and a 14-year low vs. the British pound. The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes "has risen by just 0.13 euro over the past week compared to the $1.58/bbl rise in dollar terms," Horsnell reported Nov. 29.

Meanwhile, international oil companies are reportedly tightening security measures to protect workers in the politically volatile Niger Delta area in Nigeria. Some 700,000 b/d of oil production has already been shut in because of civil unrest in that area, and companies say they may be forced to curtail more output if attacks continue on their workers and facilities.

"On the geopolitical front, the dangers appear to be growing in several areas," Horsnell said. "In Iraq, the unraveling of the state appears to us to be accelerating, and the growing diminution of control leads us to expect greater degradation within the oil sector. Beyond the collapse of logistics and infrastructure, the main threat to exports from [southern Iraq] would be a developing schism within the Shia community, and that appears to be in progress."

Because of such factors, 2007 "still looks to us like a year in which [front-month crude futures price] averages will be above $70/bbl," he said, up from a projected 2006 average of $66.30/bbl for benchmark US crude on the New York market.

Energy prices
The January contract jumped by $1.47 to $62.46/bbl Nov. 29 on the New York Mercantile Exchange. The February contract gained $1.43 to $63.82/bbl. Heating oil for December delivery escalated by 6.7¢ to $1.80/gal on NYMEX. Unleaded gasoline for the same month climbed 4.4¢ to $1.67/gal.

The January natural gas contract shot up by 31.2¢ to $8.87/MMbtu. On Nov. 30, EIA reported the withdrawal of 32 bcf of natural gas from US underground storage in the week ended Nov. 24. That was above the consensus of Wall Street analysts and compared with withdrawals of 1 bcf the previous week and 51 bcf during the same period last year. US gas storage now stands at 3.4 tcf, up by 185 bcf from year-ago levels and 230 bcf above the 5-year average.

"The large withdrawals last year during this period (due to an abnormally cold spell last year) may be tough to match this time around, leading to a possible increase in the year-over-year natural gas storage surplus," said analysts in the Houston office of Raymond James & Associates Inc.

In London, the January IPE contract for North Sea Brent crude rose by $1.86 to $63.07/bbl. The December gas oil contract was up by $7.75 to $555.50/tonne.

OPEC's average basket price increased by 80¢ to $57.28/bbl on Nov. 29. Meanwhile, just days after Ecuador announced its intention to rejoin OPEC, Sudan and Angola also expressed their interest in joining the group.

"The sole addition of Ecuador which pumps 540,000 b/d seemed inconsequential. However, by tallying Sudan (500,000 b/d) and Angola (1.4 million b/d) the combined production of these three nations represent approximately 8% of current OPEC production," said Raymond James analysts. "The addition of new member states to the organization would allow OPEC to [wield] further influence in its ability to sway production and pricing of crude oil in world markets. No time frame has been set as to when the new members would be expected to join."

Contact Sam Fletcher at samf@ogjonline.com.

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