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Crude challenges $60/bbl ceiling

Sam Fletcher
Senior Writer

The March contract for benchmark US light, sweet crudes jumped to $59.89/bbl Feb. 9, the highest front-month crude closing on the New York Mercantile Exchange since late December, as a frigid cold front embraced the eastern US and a pipeline fire shut in 95% of production at Elk Hills oil and gas field near Bakersfield, Calif.

"Crude's up tick since the start of the year has met firm resistance at $60/bbl," said analysts at Raymond James & Associates Inc. "The fundamentals underlying the oil market support such a move, although there will likely be profit-taking and short-covering since prices have shot up about $9/bbl in the last 3 weeks, a result of continuing cold weather and added geopolitical risk. Iranian leader Ayatollah Ali Khamenei cautioned about challenging [his country's] nuclear program as further pressure could provoke antagonistic targeting of US interests worldwide."

Meanwhile, Nigeria oil workers contemplated a strike because of rebel attacks and kidnappings in the Niger Delta oil-producing region.

"Technically, the strength of [the Feb. 8] closing rally has thrown crude oil back into positive momentum," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

A Feb. 6 fire at Elk Hills shut in most of the field's production of 120,000 b/d of oil equivalent. It is the largest natural gas field in California, Raymond James reported, but its production is 60% liquids. Occidental Petroleum Corp., operator, declared force majeure, suspending contractual deliveries from that field. No timeframe was given for returning the field to production.

The Energy Information Administration said US crude inventories slipped by 400,000 bbl to 324.5 million bbl in the week ended Feb. 2. US gasoline stocks increased 2.6 million bbl to 227.2 million bbl, while distillate fuel inventories declined by 3.7 million bbl to 136.3 million bbl, with decreases in both heating oil and diesel. "For the first time in a while, the latest US weekly data have demand indications that are pretty good across the board," said Paul Horsnel, Barclays Capital Inc., London. "Heating oil inventories have fallen for a third week, bringing them closer to their 5-year average."

EIA reported the withdrawal of 224 bcf of natural gas from US underground storage. US gas storage was at 2.3 tcf, finally dropping below year-ago levels by 26 bcf but still above the 5-year average by 378 bcf.

Golden corn
High energy prices have attracted media attention for many months, but corn prices also are at record high levels on the Chicago Board of Trade, hovering around $4/bushel since December, well above the average price of $2.40/bushel over the last 10 years.

"This current price rally is based on expectations for the coming ethanol production boom to stretch corn demand beyond US farmers' ability to supply, which is a more enduring price driver," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Corn prices escalated more than 70% in 2006, primarily because of increased demand for ethanol. Commodity Futures Trading Commission data show the rise in corn prices also coincides with a substantial increase in noncommercial net long positions.

With the market price for corn escalating, US farmers planted 78 million acres with corn last year. In Midwest farms and markets, there is speculation that an additional 6-12 million acres of corn will be planted in 2007, "with recent surveys at the top of the range," Rousseau said in a Feb. 7 report.

"An extra 10 million acres coming into corn in 2007 and a 159 million bushel/acre average yield suggests a record 12.6 billion bushel harvest and increased season-ending corn inventories," said Rousseau. "Our model assumes a 4 billion gal year-over-year increase in ethanol production from September 2007-August 2008, representing a 1.5 billion bushel increase in corn demand."

The lure of an El Dorado of corn and ethanol has many US farmers demanding to pull idle farmland out of government conservation programs to cash in on this golden opportunity. As a result, the US Agriculture Department is considering releasing acreage from its Conservation Reserve Program in order to produce more corn for ethanol. That program pays farmers to idle environmentally sensitive low-producing land. A decision is expected by early summer, but the acreage wouldn't go into production until 2008, officials said.

Meanwhile, Rousseau warned, "A number of these ethanol projects have yet to begin construction and could be delayed or canceled. Although corn futures prices are currently well above our forecasts, we believe it is important to understand the context and that prices could reverse as quickly as they rose."

(Online Feb. 12, 2007; author's e-mail: samf@ogjonline.com)



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