The February contract for benchmark US light, sweet crudes broke through former market support at $55/bbl to close at $54.02/bbl, down $1.62 for the day, after trading at $53.44-55.81/bbl Jan. 10 on the New York Mercantile Exchange. It fell further, closing at $51.88, Jan. 11.
The next key support level for the February crude contract was $50/bbl, "which in the current volatility can be reached in 2 days," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. That price, however, "has now become the consensus and should be a strong support," he said.
Meanwhile, Jakob noted "some supportive flags that will need watching," including "for the first time this year" a reduction of all crude open interest for both North Sea Brent and benchmark US crudes in both the New York and London markets. "This would suggest that some liquidation has started, and, while it can bring some further violent correction, a further confirmation of falling open interest would point to the start of an exhaustion move," said Jakob. In addition, he said, "The rest of the commodity complex has found a floor for now. The oil correction is now purely an oil affair rather than a general commodity sell-off."
The Energy Information Administration report on US inventories of crude and refined products showed demand was dropping as mild winter weather continued. Commercial inventories of benchmark US crudes fell by 5 million bbl to 314.7 million bbl in the week ended Jan. 5. Gasoline stocks rose by 3.8 million bbl to 213.3 million bbl in that period, while distillate fuel inventories jumped by 5.4 million bbl to 141 million bbl, with gains in both heating oil and diesel (OGJ Online, Jan. 10, 2007). It marked the fourth consecutive week that distillate and gasoline supplies increased, but crude inventories have fallen for 7 weeks.
"The tumbling crude oil price has had its effect on the Organization of Petroleum Exporting Countries, with its spokesman urging its members to 'comply with the agreed cuts,'" said analysts in the Houston office of Raymond James & Associates Inc. "OPEC had announced a cut of 1.2 million b/d in October, and another 500,000 b/d production cut is scheduled to take place in February. Our analysis suggests that only about 65% of the agreed October cuts have been implemented. The latest slide may just tip the scales in favor of better compliance with the next agreed production cut."
Jakob said, "Despite its claims otherwise, it is evident that OPEC is trying to defend a price rather than a supply and demand picture. It starts to talk about cuts as soon as the price approaches $55/bbl but fails to act as soon as it approaches $60/bbl."
While crude prices slipped lower that week, natural gas broke its 5-week downward spiral in the New York market Jan. 8, both because of weather outlooks. The February natural gas contract escalated by 12.4¢ to $6.76/MMbtu Jan. 10 on NYMEX. On the US spot market, gas at Henry Hub, La., jumped by 36¢ to $6.42/MMbtu. "Short-term weather forecasts from the National Oceanic & Atmospheric Administration (both 6-10 day and 8-14 day) continue to show that colder weather is likely in the latter part of January. This may provide some support to natural gas prices," said Raymond James analysts.
The February gas contract fell back to $6.29/MMbtu Jan. 11 when EIA reported withdrawal of 49 bcf of natural gas from US underground storage in the week ended Jan. 5. That was above the consensus of Wall Street analysts and compared with withdrawals of 47 bcf the previous week and 20 bcf a year ago. US storage was then slightly above 3 tcf of gas, up by 401 bcf from year-ago levels and 461 bcf above the 5-year average.
"We believe that many E&P companies are prepared to face natural gas price volatility this year, as the average company has hedged approximately one third of its gas at $7-8/Mcf, with room for upside should the energy markets improve throughout the year," said Raymond James analysts. "Short-term, energy investors could take a more conservative stance by looking at well-hedged producers, which will provide the most insulation from price volatility."
Hedging by producers "will help generate ample cash flow to fund bullish capital spending programs and even free cash flow (which could be used for share repurchases or dividends, for instance)," the analysts said. "While acknowledging the possibility of further price fluctuations and milder weather throughout this winter, we feel that E&P stocks should still fare well in 2007."
(Online Jan. 15, 2007; author's e-mail: firstname.lastname@example.org)