MARKET WATCH: January crude futures expire under $34/bbl

Sam Fletcher
Senior Writer

HOUSTON, Dec. 22 -- The expiring January contract for benchmark US light, sweet crudes fell to a 4-year record-low closing under $34/bbl Dec. 19 on the New York futures market with crude storage at Cushing, Okla., up 4.7 million bbl to 27.5 million bbl, the largest amount since April 2007.

Physical storage constraints at Cushing, a hub for crude trades and transportation, drove the January price "abnormally lower and created the largest spread between the 2 most active contract months [January and February] since 1986," said analysts at Pritchard Capital Partners LLC, New Orleans. They also reported "a surge in net speculative investment in crude complex, the highest since May." That, they said, is "feeding the emerging view that markets may have hit bottom for now, although fears over the outlook for demand tempered hopes for a bounce."

In Houston, analysts at Raymond James & Associates Inc. said the price of the new front-month February contract was up in pre-market trading Dec. 22 "following another interest rate cut from China, continued US dollar weakness vs. the euro, and comments from the Organization of Petroleum Exporting Countries that members will comply with the latest supply cuts."

They said, "The comments were made to instill confidence in the group as prices declined following last week's largest single production cut (2.2 million b/d) in OPEC's history."

However, Prichard Capital analysts said, "Asian refiners, many of which had expected at least some of OPEC's biggest producers to make deeper visible cuts in January oil shipment schedules over the weekend, have yet to receive notice of any further reductions to oil supplies since the group announced cuts last week. OPEC detailed allocation of new output cuts among members: Iran has the largest quota reduction of 562,000 b/d, while Saudi Arabia, UAE, and Kuwait each are expected to cut 375,000 b/d."

Meanwhile, Raymond James analysts said market fundamentals for natural gas are deteriorating rapidly. "The combination of strong supply growth and rapidly declining demand has caused an ugly natural gas outlook to turn much worse. Currently, the US natural gas market has 6 bcfd (or 10%) more gas in the system than the same time last year. That is a recipe for disaster," they said.

"Economic concerns in the US are now weighing heavily on industrial and power generation demand while the worldwide recession has depressed all commodity prices, effectively eliminating any fuel switching incentives. Altogether, these changes have dramatically darkened our near-term outlook on natural gas, resulting in the downward revision of our 2009 forecast to $5/Mcf from $6.75/Mcf. It now looks like US producers will have to shut in around 800 bcf of natural gas production in 2009," they said. "While our expectations of a near 50% reduction in the 2009 gas rig count will likely be too little, too late for 2009 gas prices, it may be sufficient to balance the market by 2010. Accordingly, we have initialized a 2010 forecast of $8/Mcf."

Energy prices
The January contract for benchmark US light, sweet crudes traded at $32.40-$37.59/bbl Dec. 19 before closing at $33.87/bbl, down $2.35 for the trading session on NYMEX. The more active February contract gained 69¢ to $42.36/bbl. On the US spot market, West Texas Intermediate at Cushing was down $2.35 to $33.87/bbl. Heating oil for January delivery gained 1.91¢ to $1.39/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.64¢ to $97¢/gal.

Natural gas for the same month dropped 21.4¢ to $5.33/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., increased 7.5¢ to $5.68/MMbtu.

In London, the February IPE contract for North Sea Brent crude gained 64¢ to $44/bbl. Gas oil for January lost $9.25 to $446/tonne.

The average price for OPEC's basket of 13 reference crudes fell $1.76 to $37.72/bbl on Dec. 19. So far this year, however, OPEC's basket price averages $95.87/bbl, up from an average $69.08/bbl for all of 2007.

Contact Sam Fletcher at samf@ogjonline.com

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