MARKET WATCH: Crude rally fails to check losses

Sam Fletcher
Senior Writer

HOUSTON, Nov. 24 -- Oil futures prices climbed to the $50/bbl range Nov. 21, pulled by a late surge in the stock market on news that US President-elect Barack Obama will likely nominate New York Federal Reserve Pres. Timothy Geithner as Treasury secretary.

The new front-month January contract for benchmark US crude rose as high as $51.12/bbl in volatile intraday trading but still posted a 13% drop for the week. Meanwhile, job losses accelerated with the US Bureau of Labor Statistics reporting Nov. 21 that unemployment is up at least 2% over the past year in 12 states.

Paul Horsnell, Barclays Capital Inc., London, said Nov. 21, "A fresh set of lows were hit over the past week, with West Texas Intermediate at $49/bbl, the Organization of Petroleum Exporting Countries' basket at $44/bbl, and startlingly, the value of the Mexican export basket down to just $34/bbl."

WTI "continued in a freefall to test the lows of 2007 and lost $7.67/bbl in the week [ended Nov. 21], while [North Sea] Brent lost relatively less and was down $5.05/bbl on the week," said Olivier Jakob at Petromatrix, Zug, Switzerland. "On [Nov. 21] the OPEC basket stood at $42.56/bbl and the Mexican basket at $34.69/bbl."

In the New York market, Jakob said, "Heating oil for December was down $5.55/bbl and reformulated blend stock for oxygenate blending (RBOB) was closer to the losses on WTI and left $7.13/bbl [on] the tables. Natural gas was a bit higher and gained 2.6% on the week. WTI is now $48/bbl lower than a year ago and $97/bbl lower than the summer peak."

In the Houston office of Raymond James & Associates Inc., analysts said major market indices and commodities were priced higher in premarket trading Nov. 24 following the federal government's announced rescue package for financial giant Citigroup Inc. and the prospect of further supply cuts by OPEC. The US government will guarantee losses on $300 billion of Citigroup's assets and inject $20 billion of new capital into the bank.

"Furthermore, Venezuela and Iran urged OPEC to reduce supply at its emergency meeting this week [Nov. 29]. On top of the Citigroup bailout news, President-elect Barack Obama is expected to unveil his economic team today, which could work to further boost confidence in the markets," Raymond James analysts said.

Possible 'turning point'
Still, Horsnell said, "Up to this point, the external market context, demand-focused sentiment, data flow, and pure momentum have all meant that the direction of prompt oil prices has been by and large a one-way street heading downwards. Anything that might have looked like a fragile green shoot of potential price recovery has immediately been steamrollered and covered by a thick layer of smoking asphalt by the road gang of negative sentiment."

However, he claims to see "the first signs of a turning point" in market dynamics and in both supply and demand-side indicators. Despite frequent headlines about investors dumping commodities, "fresh short-term unhedged money is pouring into the oil market at a substantial rate, with a very strong bias towards the short side," he said. "In absolute terms, the speculative short on oil is the largest it has ever been, and, in our view, some 40% of that absolute short has been initiated over the past month alone."

On the supply side, Horsnell said, "It is becoming increasingly clear that the oil industry has in effect gone on strike. Decisions have been postponed, projects cancelled or put into the deep freeze, and, as in many other sectors, the imperative to conserve cash has become dominant. In some areas of the world, cost structures and fiscal structures are such that operations have become cash negative. Discretionary maintenance has been delayed, and in some cases it appears that cuts are being made to what would be normally thought of as nondiscretionary maintenance. It is those areas in particular where we are becoming increasingly concerned about the weakness of supply, not only beyond 2010 but also in 2009."

Barclays Capital currently projects a 400,000 b/d decline in non-OPEC supplies in 2009—or lower if prices remain much longer at or below current levels. "Were conditions to reach the point where stripper wells came off stream, and where some natural gas liquids were being kept in the gas stream rather than being stripped out, then the non-OPEC decline could stretch beyond 1 million b/d," Horsnell said.

As for demand, he said, "The provisional US and Japanese data…are of course both very weak, down by a combined 2 million b/d even before the imminent revision of the US number. However, the rest of the Organization for Economic Cooperation and Development was better, recovering from a year-over-year fall of 600,000 b/d in August to a rise of 200,000 b/d in September, primarily due to a strong improvement in the figures for France, Germany, Canada, and Korea. Without that improvement, the OECD as a whole could have been as much as 3 million b/d down year-over-year, but with that improvement the decline is at least containable. OECD demand remains very weak, but at least it is not weakening further, and early signs seem to suggest that the coming months will see at least a relative improvement from the depths of OECD demand weakness seen in the third quarter."

Energy prices
The January contract for benchmark US light, sweet crudes climbed 51¢ to close at $49.93/bbl Nov. 21 on the New York Mercantile Exchange. The February contract gained 55¢ to $50.96/bbl. On the US spot market, WTI at Cushing, Okla., was down 49¢ to $49.13/bbl. Heating oil for December increased 2.37¢ to $1.70/gal on NYMEX. RBOB for the same month increased 5.73¢ to $1.06/gal.

The December natural gas contract escalated 16.4¢ to $6.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 15.5¢ to $6.61/MMbtu.

In London, the January IPE contract for North Sea Brent gained $1.11 to $49.19/bbl. The December contract for gas oil fell $9 to $520.75/tonne.

The average price for OPEC's basket of 13 benchmark crudes lost $1.50 to $42.56/bbl on Nov. 21. So far this year, OPEC's basket price has averaged $100.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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