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Crude futures price closes at 5-week low

Sam Fletcher
Senior Editor

The February crude contract fell 71¢ to $90.13/bbl Jan. 17 on the New York Mercantile Exchange—its lowest closing in 5 weeks—after Federal Reserve Chairman Ben Bernanke told the US House Budget Committee downside risks to US economic growth in 2008 were "more pronounced" than ever. Bernanke said he was "not forecasting a recession," although a US government report showed new home construction has slowed to its lowest pace in 6 years.

Nevertheless, the market continued to support crude prices at $90/bbl—"still a very high flat price level taking in consideration the overall gloom and doom, and the product cracks have been holding (which is to be expected when the refineries are shutting for maintenance)," said Olivier Jakob of Petromatrix GMBH, Zug, Switzerland. Having fallen for three sessions, the February crude contract climbed to $90.57/bbl Jan. 18 after the White House announced a tax package aimed at stimulating the troubled US economy. Investors had little faith in the stimulus package, but traders found lower price bargains.

Energy prices fell earlier as the Energy Information Administration reported a larger-than-expected build in US crude inventories—the first gain in 9 weeks. Crude inventories increased 4.3 million bbl to 287.1 million bbl in the week ended Jan. 11. Gasoline stocks gained 2.2 million bbl to 215.3 million bbl and distillate fuel inventories were up 1.1 million bbl to 129.8 million bbl. "The market is signaling that the demand side of the energy equation is much more important than the supply side," said Raymond James analysts.

"It does now look as if the long seasonal build in US crude oil inventories has finally started," said Paul Horsnell at Barclays Capital Inc., London. "The mechanics of the rebound in inventories in the latest data are fairly straightforward; refinery runs moved to a more-normal seasonal level in falling dramatically by 760,000 b/d, while imports rose by 580,000 b/d. That is a combined swing of a huge 1.34 million b/d, but despite that the patterns do not seem particularly abnormal. Runs are now roughly where they should be seasonally, and imports are also pretty much at par." Cushing, Okla., crude inventories "fell from their already low levels, but should still rise seasonally, if erratically, from here without threatening to spearhead any move towards a significant contango," he said.

Jakob said, "The supportive strength of the US market in 2007 has not come from strong demand but from capacity constraints and especially from refineries having great difficulties restarting from their maintenance schedule. As we enter the US refinery maintenance cycle, crude oil stocks should start their seasonal rebuilding, but products will be exposed to the refinery restart risk."

The market also apparently was influenced by President George W. Bush's recent visit to Saudi Arabia where he urged King Abdullah bin Abdulaziz al-Saud to increase oil production to ease energy prices. However, Horsnell said, "A ramping up of pressure on the Organization of Petroleum Exporting Countries from external leaders often tends not to facilitate decision making." OPEC members are scheduled to meet Feb. 1. Horsnell said, "The change in the information available to ministers since their last meeting Dec. 5 would not seem to justify an increase. In other words, if they could not sanction an increase before, it will be harder to sanction an increase this time."

Energy prices
UBS Securities LLC, New York, lowered its 2008 and 2009 composite spot natural gas forecasts to $7.25/MMbtu and $7.60/MMbtu, respectively, from $8/MMbtu and $8.25/MMbtu, respectively, based on the following:

-- Stronger-than-expected US gas production growth [an estimated 2.5% in 2008], primarily from increased production from the Barnett shale in Texas.

-- US gas storage volumes that are well above historical levels.

-- Warmer-than-normal weather this winter.

-- A slowdown in US economic growth.

"Canadian imports have held steady to date despite reduced drilling activity, adding to the storage surplus," said Ronald J. Barone, managing director of UBS Securities. "With half the winter behind us, weather has been 6.1% warmer than normal. The aggregate supply growth has been somewhat offset by stronger-than-expected demand, but it has not been enough to reduce the storage surplus to a level that will support a natural gas price in excess of $8/MMBtu. As always, weather remains a wildcard."

UBS raised its 2008 and 2009 West Texas Intermediate crude price forecasts to $85/bbl from $74/bbl in 2008 and to $78/bbl from $73.25/bbl in 2009, however, as a result of greater-than-expected tightening of market fundamentals in the fourth quarter of 2007, "which drained crude oil inventories," and "a slower-than-expected economic deceleration in the US economy."

(Online Jan. 21, 2008; author's e-mail: samf@ogjonline.com)


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