MARKET WATCH: Energy prices fall; markets watch OPEC

Sam Fletcher
Senior Writer

HOUSTON, Dec. 15 -- Energy prices fell Dec. 12 when Democrat and Republican Senators couldn't agree on a proposed $14 billion bailout of General Motors and Chrysler via emergency loans.

That ended an earlier rally stimulated by growing indications that the Organization of Petroleum Exporting Countries and nonmember Russia may announce major production cuts at OPEC's Dec. 17 meeting in Oran, Algeria. Still, said Olivier Jakob at Petromatrix, Zug, Switzerland, "West Texas Intermediate did not manage to test the support of $40/bbl and rebounded $5.47/bbl in the week, while [North Sea] Brent was up $6.67/bbl. Heating oil was up by only $2.80/bbl, but reformulated blend stock for oxygenate blending (RBOB) was stronger and gained $7.41/bbl. Natural gas, however, remains under heavy pressure and lost 4.4% in the week. WTI is $45/bbl lower than a year ago."

Meanwhile, crude prices increased in premarket trading Dec. 15 partly because "the US dollar declined vs. the euro and yen prior to tomorrow's Federal Reserve meeting on expectations that the benchmark rate will be cut…from 1% to 0.5%," said analysts Dec. 15 in the Houston office of Raymond James & Associates Inc.

OPEC outlooks
The market's primary focus remains on OPEC, especially after Pres. Chakib Khelil hinted over the weekend at a possibly severe production cut at the upcoming meeting. In New Orleans, analysts at Pritchard Capital Partners LLC said, "Russia, the largest non-OPEC supplier, backs a cut and will attend the meeting, while OAO Lukoil Chief Executive Leonid Fedun suggested that a cut of 2.5 million b/d would support oil prices in a range of $60-80/bbl. China oil demand declined 3.5% in November [from year-ago levels] as the economy brakes more sharply than expected, caused by weaker end-user consumption and a draw-down in record-high stockpiles."

Raymond James analysts said, "OPEC's biggest battle is the decreased demand, and many forecasters predict that 2009 demand will be the weakest in more than 20 years, as the economies of the two largest consumers, US and China, have significantly slowed. Russia…will send two representatives to join the meetings, though many people think any Russian production cuts are just a disguise of Russia's natural production decline from underinvestment."

At the Centre for Global Energy Studies in London, analysts said OPEC's decision "will not be whether to cut output quotas further, but how deep to make the cut." CGES said, "The price hawks, led by Presidents Hugo Chavez of Venezuela and Mahmoud Ahmedinejad of Iran, are likely to call for a reduction of 2 million b/d or more, while Saudi Arabia is thought to consider a further reduction of around 1 million b/d as adequate. The Kingdom will also want clear evidence that all of its fellow OPEC members are implementing their shares of the [1.5 million b/d] cuts agreed in Vienna in October."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, optimistic analysts said, "For the first time in several weeks, there are signs that crude prices might have bottomed out and could be heading upwards again. OPEC countries now seem to be getting a grip in terms of implementing the 2 million b/d of output cuts already agreed to, with estimated production data for November showing production about 1 million b/d lower than in October."

They also noted "a growing consensus" that OPEC will announce an additional reduction of 1 million b/d. "Some press reports suggest that cuts of up to 2 million are possible although this is not as easy as many think. Total OPEC cuts of that magnitude require Saudi Arabia to cut its production by 600,000 b/d on the assumption of pro rata cuts—if Saudi output falls to the implied level of 8.2 million b/d, there are serious questions about the availability of sufficient associated gas to supply industry, particularly petrochemicals," said KBC analysts. "Even so, with Saudi Arabia widely believed to require an oil price of $55/bbl to balance its budget, there is clearly a commitment to take whatever action is needed to underpin oil prices."

CGES analysts concluded: "As long as the 11 [OPEC] members that it will affect abide by the implied new quota of 26.3 million b/d, oil prices should begin to rise again in 2009, but not to the levels sought by even the more modest of OPEC's members. It remains highly unlikely that the organization will be able in the near future to return oil prices to the $75/bbl favored by Saudi Arabia, far less the $80-100/bbl sought by…Chavez."

A $1.7 trillion windfall
Regardless of what happens in Algeria, Raymond James analysts said energy consumers are already profiting from a low-price windfall.

"The dramatic decline in global energy prices—oil, gas, and coal—carrying forward into 2009 represents a sizable 'stimulus' for the global economy, particularly heavily energy-importing countries such as the US and China," Raymond James analysts said. "For the world's consumers as a whole, we estimate the 2009 year-over-year benefit from lower energy prices to be $1.7 trillion, or 3.2% of global GNP. This benefit, of course, is in addition to the trillions of dollars of public spending initiatives designed to stimulate economic activity," they said.

Raymond James analysts said, "These material savings should facilitate a gradual recovery in oil demand, though the timing of this process will largely depend on the pace of macroeconomic recovery. While macrovisibility is still minimal, we believe that our current working assumption of a 2% decline in 2009 global oil demand will probably prove overly aggressive. Once oil demand begins to rebound within the context of broader global economic recovery, it should support a sustained rise in oil prices, hence our gradually rising price forecast beyond the lows of 1the first quarter of 2009."

Energy prices
The January contract for benchmark US light, sweet crudes fluctuated at $43.32-47.51/bbl Dec. 12 before closing at $46.28/bbl, down $1.70 for the day on the New York Mercantile Exchange. The February contract lost $1.72 to $49.12/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.70 to $46.28/bbl. Heating oil for January delivery declined 1.32¢ to $1.49/gal on NYMEX. The January RBOB contract dipped 0.09¢ but was virtually unchanged at $1.08/gal.

Natural gas for the same month dropped 11¢ to $5.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 26.5¢ to $5.57/MMbtu.

In London, the January IPE contract for North Sea Brent crude declined 98¢ to $46.41/bbl. The January gas oil contract lost $8.25 to $458/tonne.

The average price for OPEC's basket of 13 reference crudes gained $1.20 to $41.32/bbl Dec. 12.

Contact Sam Fletcher at samf@ogjonline.com.

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