During Nov. 26-30, the last full week of trading prior to the Organization of Petroleum Exporting Countries' Dec. 5 meeting, the front-month contract for benchmark US light, sweet crudes "suffered in absolute terms" both its largest weekly change and largest weekly decline ever, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.
The January US crude contract dropped a total $9.47/bbl during the week, closing at $88.71/bbl Nov. 30 on the New York Mercantile Exchange. That surpassed "by exactly $1/bbl the collapse of March 2003 that followed confirmation of the strike on Iraq," Jakob said. The January IPE contract for North Sea Brent crude was "relatively stronger" with a loss of $7.50/bbl over the week to close at $88.26/bbl.
Despite the sharp drop in near-month crude prices, the Societe Generale Group, Paris, said the 5-year forward price was more resilient, declining to $83-84/bbl from $85-86/bbl in that period. "The backwardation has become significantly shallower, and in fact the low point on the forward curve is now December 2010; beyond this date, the curve is in shallow contango. The flattening of the curve indicates growing uncertainty about how tight the near-term physical markets will be and about the direction of front-month prices," said SGG analysts.
The market provided mixed signals during the week. The NYMEX sweet, light crudes contract dropped $3.80 to $90.62/bbl Nov. 28 after federal officials reported the fifth draw of US oil supplies in 6 weeks. But even as analysts were predicting the market's loss of momentum would prevent another surge toward $100/bbl crude, an explosion and fire shut down a key pipeline system transporting 1.5 million b/d crude from Canada to Midwest US refineries—representing 15% of total US oil imports. As a result, crude futures prices jumped to $95.17/bbl in overnight electronic trading, again illustrating how quickly a potential threat to oil supplies can turn a volatile market.
Enbridge Energy Partners LP, Houston, reported two employees died in an explosion and fire on its oil pipeline system 3 miles southeast of its Clearbrook, Minn., terminal Nov. 28. All four pipelines in that system were immediately shut down and isolated.
News of the mishap prompted speculation that the US government would offer emergency supplies from the Strategic Petroleum Reserve while OPEC might increase production. But by Nov. 29, Enbridge had restarted three of the four lines system and said the line where the explosion and fire occurred should return to service in a few days. Cause of the mishap was still under investigation in early December.
But fast action in restarting most of the pipeline system helped cool the market, with the January crude price climbing to $91.02/bbl Nov. 29 on NYMEX. Since a major disruption of crude supplies to Midwest refineries "did not materialize," the market quickly resumed "its corrective pattern," Jakob noted.
Waiting for OPEC
Through late November and early December, crude prices were "exposed to sound-bite headlines" of the possible outcome of the OPEC meeting. SGG analysts acknowledged the possibility OPEC might raise crude production quotas. However, they said, "We are skeptical about significant, sustained actual output increases." More likely, they said, "OPEC will keep crude supply fairly tight. Production will not exceed the current quarter's 31.2 million b/d in any quarter next year and will be cut back in the second and third quarters."
SGG analysts said there was "no reason for OPEC to change its strategy of tight crude stocks and backwardation, especially with growth in NGLs output and with prices easing from current levels." They therefore predict US crudes will average $81/bbl in 2008, up from $72/bbl in 2007. "Geopolitical risk also is expected to support prices next year. Price premiums will wax and wane, depending on developments. Nigeria, Iran, Iraq, and Saudi Arabia are the usual suspects [for political risks]. Russia and Venezuela add spice to the mix," SGC analysts said.
Jakob said, however, "We need to keep in mind that [Saudi Arabia] surprised everybody by sponsoring a 500,000 b/d increase at the [Sept. 11] meeting. At the time West Texas Intermediate was trading between $75/bbl and $78/bbl with a low of $68.60/bbl 2 weeks before the meeting, and by increasing production OPEC took the risk of a drop to $65/bbl." He said, "This time around WTI has been trading between $95/bbl and $98/bbl with a low of $88.45/bbl 1 week before the meeting. We are still $20/bbl higher than the acceptable price levels set at the last meeting while the fear of economic recession is much stronger."
(Online Dec. 3, 2007; author's e-mail: firstname.lastname@example.org)