MARKET WATCH: Oil prices continue to fall

Sam Fletcher
Senior Writer

HOUSTON, Dec. 24 -- Oil prices continued to fall Dec. 23 with the new front-month crude dropping below $40/bbl in thin trading in the New York futures market.

It marked the seventh closing loss for front-month crude in the last eight sessions. Crude dropped nearly 2% "on a host of bearish economic data, all of which point to reduced global demand," said analysts in the Houston office of Raymond James & Associates Inc.

However, natural gas futures prices climbed more than 8% because of colder Midwest and East Coast weather. "At this time of year, it's all about the weather," said analysts at Pritchard Capital Partners LLC, New Orleans. Still, they reported gas prices down slightly in early trading Dec. 24.

Meanwhile, US officials said the gross domestic product contracted 0.5% in the third quarter following a 2.8% increase in the second quarter of 2008, an ominous indicator in the world's biggest economy.

The US Labor Department said initial requests for jobless benefits jumped to a seasonally adjusted 586,000 in the week ended Dec. 20, from an upwardly revised figure of 556,000 the previous week. That increase exceeded economists' expectations and represents the largest number of benefits claims since November 1982.

The Commerce Department documented a drop in consumer spending for the fifth consecutive month, down 0.6% in November. But part of the decreased spending was the result of much lower gasoline prices.

According to the latest MasterCard Spending Pulse report, US demand for gasoline last week increased by 3.4% over the previous week because of increased shopping and travel before the Christmas holiday, although demand is still down 3% from year-ago levels.

"Both MasterCard and the Department of Energy agree that the recent lows in [US retail gasoline] sales were reached in the first week of October and have been steadily improving since," said Olivier Jakob at Petromatrix, Zug, Switzerland. Gasoline sales are reported up 780,000 b/d from early October.

Jakob said, "Gasoline futures are still the largest pressure point on the energy complex, but sales data are indicating some recovery of demand. The Asian and European naphtha cracks have rebounded quite sharply over the last 10 days, the crude arbitrage has gone negative over the last 10 days (this will work against the gasoline arbitrage)….the evolution over the last 10 days of all these parameters is a warning flag to be considered before having a too negative view on gasoline."

In other news, Raymond James analysts earlier reported the "typical Middle Eastern oil-producing country" needs an oil price of roughly $70/bbl to sustain budgetary needs. Now, they reported Dec. 24, "Russia, it turns out, is in a similar boat—and that boat has sprung a leak. The Kremlin said today that it expects a budget deficit for the first time in a decade. Russia's original 2009 budget was based on $95/bbl oil, since revised to $50/bbl, but with oil below $40/bbl, Russia will almost certainly need to tap its 'rainy day' fund in the interim."

US inventories
The Energy Information Administration said Dec. 24 commercial US inventories of crude fell by 3.1 million bbl to 318.2 million bbl during the week ended Dec. 19. Wall Street analysts were expecting an increase of 500,000 bbl for the week. Gasoline stocks jumped by 3.3 million bbl to 207.3 million bbl during the same period, exceeding expectations of an 800,000 bbl build. Distillate fuel inventories increased by 1.8 million bbl to 135.3 million bbl, surpassing an expected increase of 700,000 bbl.

Imports of crude into the US fell 555,000 b/d to 9.1 million b/d in that period when fog disrupted shipping along the Gulf Coast. The input of crude into US refineries declined by 41,000 b/d to 14.5 million b/d with plants working at 84.7% of capacity. Gasoline production dropped to 9.1 million b/d and distillate fuel production decreased to 4.4 million b/d.

EIA also reported the withdrawal of 147 bcf of natural gas from US underground storage in the week ended Dec. 19. That left little more than 3 tcf of gas in storage, 35 bcf less than in the same period a year ago but 99 bcf above the 5-year average.

Energy prices
The February contract for benchmark US light, sweet crudes dropped 93¢ to $38.98/bbl Dec. 23 on the New York Mercantile Exchange. The March contract lost 85¢ to $42.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., jumped $3.17 to $33.98/bbl. The January contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.02¢ to $86¢/gal on NYMEX. Heating oil for the same month declined 1.45¢ to $1.33/gal.

The January natural gas contract shot up 44.3¢ to $5.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped by 0.5¢ to $5.40/MMbtu.

In London, the February IPE contract for North Sea Brent crude lost $1.09 to $40.36/bbl. Gas oil for January dropped $23 to $418/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes fell $2.43 to $34.49/bbl on Dec. 23.

Contact Sam Fletcher at samf@ogjonline.com

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