MARKET WATCH: Crude tops $94/bbl on Christmas Eve

Sam Fletcher
Senior Writer

HOUSTON, Dec. 26 -- Crude prices climbed above $94/bbl in light, mixed trading in the New York market that closed at 1 p.m. EST Dec. 24 and remained close Dec. 25 for the Christmas holiday.

Traders anticipate continued tightening of supplies with the release of a government report on US inventories of crude and petroleum products later this week as dense fog along the Gulf Coast reduced imports. Moreover, three Mexican oil ports—Dos Bocas, Cayo Arcas, and Coatzacoalcos—were temporarily closed by bad weather over the weekend.

That bullish outlook was partially offset, however, by predictions of mild weather in the Northeast US that likely would reduce demand in the world's largest heating oil market.

Analysts in the Houston office of Raymond James & Associates Inc. reported higher crude prices in early trading Dec. 26 due to "the Turkish military's decision to make certain that Kurdish rebels in northern Iraq did not have a 'silent night'" on Christmas, Dec. 25. They said, "The Turkish military sent fighter jets to bomb several bases in northern Iraq. Iraq, which has seen a sharp increase in oil production in recent months, exports oil through its northern pipeline. Also pushing crude prices higher this morning is news out of China that the government has decided to lower import taxes on gasoline, diesel, and jet fuel to help boost domestic supplies."

Drilling outlook
In a separate report, Raymond James analysts noted over the last 2 years the US land drilling industry has added "hundreds of the most efficient, fastest drilling rigs ever built," while at the same time refurbishing and upgrading much of the existing rig fleet "to much higher standards than anything available a decade ago."

However, the analysts said, "While drilling footage per well has clearly improved with the newer, improved US land rig fleet, most energy investors are not aware that the number of wells drilled per rig has yet to show any meaningful improvement. This counterintuitive outcome is directly attributable to the increasing well depths and more difficult well types being drilled. This is important because actual wells (not drilling rigs, or drilling footage) produce oil and gas. Many are incorrectly assuming that improving drilling technology means we have a surge in oil and gas production headed our way even if the rig count stays flat."

They concluded, "Short term, the Barnett shale [in Texas] is providing an unusually strong gas production surge. Longer term, the US is going to need even more rigs in order to maintain the number of wells drilled annually. Thus, the long-term (5-year) bullish North American energy outlook remains intact even though we remain bearish on gas prices for the 2008-2009 timeframe. This means next year may offer attractive entry points and lower multiples for long-term investors."

Energy prices
The February contract for benchmark US light, sweet crudes climbed 82¢ to $94.13/bbl Dec. 24 on the New York Mercantile Exchange. The March contract was up 74¢ to $93.74/bbl. The January contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.45¢ to $2.38/gal on NYMEX. However, heating oil for the same month lost 1.44¢ to $2.59/gal.

The January natural gas contract dropped 16.5¢ to $7.03/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., was unchanged at $7.04/MMbtu. Raymond James reported, "Traders continue to worry about the large natural gas storage overhang as well as the warmer 8-14 day outlook."

In London, the February IPE contract for North Sea Brent crude increased by 24¢ to $92.70/bbl. The January gas oil contract gained $12.75 to $830/tonne.

Contact Sam Fletcher at samf@ogjonline.com

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