HOUSTON, Nov. 21 -- Crude prices fell for the fifth consecutive session Nov. 20, pulled down by a tumbling stock market, with the expiring December contract dropping below $50/bbl to its lowest closing in 3 years on the New York market.
However, analysts in the Houston office of Raymond James & Associates Inc. said the new front-month January contract climbed above $50/bbl in early trading Nov. 21 on news that crude supplies from the Organization of Petroleum Exporting Countries will be down 3.8% in November as recent production cuts begin to show.
Olivier Jakob at Petromatrix, Zug, Switzerland, reported the Dow Jones Industrial Average took another nosedive Nov. 20 "and took most of the commodity complex (except gold) with it."
He said, "Technically, West Texas Intermediate remains more than anything else a derivative of the DJIA and is fully re-enforced in a negative momentum." With crude futures having broken the $49.90/bbl low of 2007, Jakob said, the next target will be $45/bbl "with a stronger floor at $40/bbl." With daily fluctuations of $5-10/bbl, he said, $40/bbl oil "is not to be excluded."
Of course, crude has traded below $50/bbl before, "but never with the current volatility," Jakob said. "As long as volatility stays as high as it is, the short sellers are facing a negative time value, as oil would fall too quickly under a value zone where the oil economics and risk vs. reward needs to be revalued. If crude oil is to sustain a price below $50/bbl, volatility needs to come off. For now volatility is increasing, not decreasing," he said.
Next week will be a brief trading week, with US markets closed Nov. 27 for the Thanksgiving holiday. "If equities are able to hold today to their overnight gains, we think it will be difficult for oil to make significant new lows on its own in front of a short trading week and a long OPEC weekend," Jakob said. OPEC ministers are scheduled to meet in Cairo Nov. 29.
Meanwhile, rebel attacks on international oil company operations in Nigeria have increased over the last 10 days. Revenues from the delta bunkering must also be taking a hit at $50/bbl," Jakob said.
In other news, Delek US Holdings Inc., a diversified energy company, said a Nov. 20 explosion and fire has temporarily halted production at its 60,000 b/d refinery in Tyler, Tex.
Jakob said, "There is currently enough of a supply overhang for the market to discount skirmishes in Nigeria or a small refinery shut by fire in the US, but we will need to cautiously monitor the aftermath of recent Somali shipjackings." Earlier this week Somalian pirates hijacked a supertanker, the 1,080-ft Sirius Star very large crude carrier, with a crew of 25 and a cargo of 2 million bbl of oil, 450 nautical miles off the coast of Kenya (OGJ Online, Nov. 17, 2008). An Indian warship subsequently attacked and sank a suspected pirate "mother ship" off the coast of Oman after it fired on the warship when Indian officers asked to search the vessel.
As a result, the AP Moller-Maersk Group, one of the biggest shipping companies with a fleet that includes tankers, has said it will route its vessels beyond the Gulf of Aden waterway that the pirates have been raiding. Frontline Ltd. is considering doing the same with its fleet of VLCC tankers. "If Frontline or other owners embark on the same deviation, it will not only increase voyage time and cost but will also result in a build up of stock at sea that will need to be added to the demand equation," Jakob said. "The longer supply line would also result in a lower stock security cover for Europe."
The 137-122 vote by the House Democratic Caucus on Nov. 20 that replaced Energy and Commerce Chairman John Dingell (D-Mich.) with Rep. Henry Waxman (D-Calif.) "brings a greater environmental focus to the post," said Raymond James analysts. "Waxman's election may herald a more proactive approach to climate change policy, though we continue to believe that the enactment of cap-and-trade legislation is not realistic until 2010 at the earliest (OGJ Online, Nov. 20, 2008)."
In Arlington, Va., analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) listed four major implications to this change:
-- Further increases in corporate average fuel economy standards are now possible, particularly as Congress continues to focus on energy efficiency, greenhouse gas controls, and economic recovery during 2009.
-- There will be one less voice defending existing infrastructure in the next zero-sum subsidy showdown between plug-in hybrid electric vehicles and ethanol.
-- A Waxman GHG bill is likely to be considerably stricter in its near-term obligations for coal-fired emitters than the Dingell-Boucher "discussion draft" released in October.
-- Waxman's leadership is likely to increase the tax burden for integrated oils and could renew calls for a "windfall" profits tax and reexamination of the market power exerted by US refiners as a result of industry consolidation.
FBR analysts said windfall taxation and an unraveling of oil industry mergers and acquisitions are unlikely, "but headline risks are certain to increase." Moreover, they said, "There is the question of how to gauge the temperament of an institution that has just cast off a tradition of rewarding seniority. The caucus decision to decapitate the dean of the House from its most powerful committee suggests to us that there will be few checks in the lower chamber on decisions taken by Speaker Nancy Pelosi (D-Calif.) and Majority Leader Steny H. Hoyer (D-Md.)." They added, "We expect that Dingell will continue to make his voice heard (and he may find himself more free to criticize ideas with which he disagrees than he might have as committee chairman)."
The expiring December contract for benchmark US light, sweet crudes fell $4 to $49.62/bbl Nov. 20 on the New York Mercantile Exchange. The new front-month January contract lost $4.68 to $49.42/bbl. On the US spot market, WTI at Cushing, Okla., was down $4 to $49.62/bbl. Heating oil for December declined 8.38¢ to $1.68/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) dropped 10¢ to $1.01/gal.
Despite forecasts for cold weather in the Eastern US, the December natural gas contract fell 42.7¢ to $6.31/MMbtu on NYMEX after the Energy Information Administration reported a bearish injection of 16 bcf of natural gas into US underground storage during the week ended Nov. 14 vs. Wall Street expectations of a 5 bcf draw (OGJ Online, Nov. 20, 2008). On the US spot market, gas at Henry Hub, La., dipped by 2.5¢ to $6.76/MMbtu.
In London, the January IPE contract for North Sea Brent crude was down $3.64 to $48.08/bbl. The December gas oil contract fell $17.50 to $529.75/bbl.
The average price for OPEC's basket of 13 reference crudes lost $1.83 to $44.06/bbl on Nov. 20.
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