MARKET WATCH: Crude price declines in mixed New York market

Sam Fletcher
Senior Writer
HOUSTON, Jan. 30 -- The front-month crude contract declined Jan. 29, giving up its gain from a 1-day rally in the previous session on the New York market, but prices for petroleum products and natural gas posted modest gains.

The drop in oil prices on the New York market was "driven by the continuing supply build, now 338.8 million bbl, in the face of slowing economic growth highlighted by weak durable goods orders and record unemployment benefits," said analysts at Pritchard Capital Partners LLC, New Orleans.

Gas prices, however, benefited from "a better-than-expected" report by the Energy Information Administration that 186 bcf of natural gas was withdrawn from US underground storage in the week ended Jan. 23, reducing the amount of working gas to 2.4 tcf (OGJ Online, Jan.29, 2009). "Importantly, the data implies the US gas market is now 3 bcfd oversupplied vs. 5-6 bcfd oversupplied the first week of January—a very bullish change," said Pritchard Capital Partners. "Colder-than-normal temperatures in the Lower 48 likely contributed to the above-average level of net withdrawals; heating degree-days were 11% above normal last week." After the close of trading Jan. 29, EIA reported November natural gas production was up 3.2 bcfd from year-ago levels, while industrial natural gas demand was down 1 bcfd."

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland, pointed out, "The West Texas Intermediate contango widens by 70¢/bbl, the [North Sea] Brent contango narrows by 28¢/bbl. The two crude benchmarks are moving in diverging trends, but given that the widening of the WTI futures contango is immediately offset by a rise in [US Gulf market] physical cash differentials, we will keep Brent as a better benchmark of the world crude oil supply and demand."

Europe has shifted from building stocks afloat to slowly reducing stocks. Jakob said, "With the flattening of the curve on non-Cushing, Okla., crude oil, freight rates are starting to move lower in a desperate effort to recreate some floating storage economics, and the pressure will remain on the Organization of Petroleum Exporting Countries to
keep some discipline if they want to curb the volume of oil idled afloat."

In London, ETF Securities Ltd. noted gold recently pushed above $900/oz for the first time since October. Analysts said investors are concerned about the paper value of currencies in the midst of large-scale government debt accumulation [via business bailouts] worldwide and are turning to gold—as they once did to oil—as a safe haven for their money.

"Governments worldwide continue to inject stimulus into their respective economies at a rapid rate. The US monetary base is currently growing at 114%/annum. This is the fastest pace of US money supply growth since records began in 1961," ETF Securities said.

GDP falls
The Department of Commerce reported Jan. 30 the US real gross domestic product fell 3.8% in the fourth quarter of 2008, compared with a 0.5% dip in the third quarter. It was the worse performance by the US economy since 1982, but analysts fear the GDP may drop even lower as the recession deepens in the first quarter of 2009. Meanwhile, the initial fourth quarter GDP figures are subject to revision—likely lower—in a Feb. 27 report that will be based on more comprehensive data.

The GDP fell as a result of diminished exports, personal consumption spending, equipment and software sales, and residential fixed investment, partly offset by increases in private inventory investment and federal government spending, said commerce officials. "The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports," they said.

The US economy grew just 1.3% in 2008, down from 2% in 2007 and marking the slowest growth since the 2001 recession.

In other news, Bloomberg wire services reported the United Steelworkers union plans to reject a contract offer from Royal Dutch Shell PLC, which could trigger a nationwide strike by 30,000 refinery workers. That would affect two-thirds of US refining capacity, although white-collar employees would keep the units running. The current contract expires shortly after midnight Jan. 31.

The potential strike may be "a case for some prudent short covering," but "we do not view the risk of strike in the US high enough to make a case of length on only that basis," said Jakob at Petromatrix. "In Europe, however, walk-outs seem to be spreading at different UK refineries (Lindsey, Grangemouth) in protest of the use of 'foreigners' for maintenance and upgrading work ('foreigners' in the UK English means Europeans from the Continent)," he said.

Energy prices
The March contract for benchmark US light, sweet crudes dropped 72¢ to $41.44/bbl Jan. 29 on the New York Mercantile Exchange. The April contract dipped 3¢ to $46.04/bbl. Subsequent monthly contracts for crude posted gains, however. On the US spot market, WTI at Cushing was down 72¢ to $41.44/bl. Heating oil for February inched up by 0.68¢ to $1.43/gal on NYMEX. For the same month, reformulated blend stock for oxygenate blending (RBOB) gained 4.74¢ to $1.23/gal.

"RBOB gasoline managed to break the resistance of $1.20/gal, something it had tried to do for most of 2009, and this commodity has been for most of this week the primary source of support to the oil complex," Jakob said. More volatility in prices was expected Jan. 30 with the expiration of February contracts for petroleum products.

"The US will now enter the fuller phase of refinery maintenance and with Cushing pushing WTI at a deeper discount to Brent, the US gasoline cracks have to readjust higher to maintain the minimum import flows of gasoline," said Jakob.

The new front-month March contract for natural gas climbed by 15.6¢ to $4.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.5¢ to $4.82/MMbtu.

In London, the March IPE contract for North Sea Brent crude was up 50¢ to $45.40/bbl. Gas oil for February increased $4.75 to $443/tonne.

The average price for OPEC's basket of 12 reference crudes advanced 50¢ to $41.21/bbl Jan. 29.

Contact Sam Fletcher at samf@ogjonline.com

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