Oil prices climb in early 2009

Paula Dittrick
Senior Staff Writer

Crude oil futures prices started off 2009 with positive movement on New York and London markets amid rising geopolitical tensions.

Most analysts agree that markets are unconvinced the Organization of Petroleum Exporting Countries can cut production fast enough to offset plummeting demand for oil.

Analysts at Barclays Capital said violence in the Middle East and disputes between Russia and Ukraine provided support for higher oil prices in very early 2009.

"Oil prices have started the year on a strong note," Barclays analysts said. "While the violence in the Gaza strip does not affect any oil supplies directly, the market fears involvement from other countries like Iran could aggravate the situation," they added.

On Jan. 4, an Iranian military commander suggested Islamic countries cut oil exports, Barclays said, adding, "This is unlikely to echo far in gulf countries already engaged in sharp cuts to support prices."

Saboteurs in the Niger Delta used dynamite to partially destroy an oil pipeline operated by Eni SPA subsidiary Agip.

Agip issued no immediate comment on the scale of damage caused by the attack, which hit the Odimodi-Ogulagha part the pipeline in Nigeria's Delta state. No group immediately claimed responsibility.

Volatility likely
Volatility was the key word for oil prices last year.

Oil prices rebounded Dec 31 with the front-month crude gaining more than $5/bbl to settle at $44.60/bbl in light trading on the New York Mercantile Exchange.

NYMEX oil prices peaked at about $147/bbl in July 2008 before tumbling upon a US credit crisis and a worldwide economic slump.

In December 2008, oil prices on NYMEX dipped to below $34/bbl, marking the lowest price in more than 4 years.

Barclays' Paul Horsnell noted, "Consensus is a process in which analysts try to look sensible and reliable, when reality tends not to be a sensible phenomenon and, in this decade at least, has involved shredding every single element of oil market consensus."

So far this decade, consensus by analysts has tended to overestimate supply from outside OPEC. Analysts also were both high and low on their oil demand forecasts, Horsnell said.

He said, "So that gives us our first forecast for 2009…that consensus is way, way, way wrong in terms of supply, demand, and price. Forecast number two is that prices will as ever both overshoot and undershoot and, as in 2008, will be driven primarily by often sharp changes in perceptions and data flow about supply and demand conditions."

US to boost oil inventories
The US Department of Energy said it will start buying oil to replenish the Strategic Petroleum Reserve. SPR was heavily drawn down following Hurricanes Katrina and Rita in 2005.

From May 2008 through yearend, DOE was prohibited by law from buying oil for SPR. DOE plans to buy 12 million bbl of crude. Deliveries are being sought for February, March, and April.

"DOE plans to take advantage of the recent sharp decline in crude oil prices to enter the market," said a DOE release issued Jan. 2.

For the week ended Dec. 26, US crude inventories rose by 500,000 bbl to 318.7 million bbl, the US Energy Information Administration reported. Gasoline inventories rose by 800,000 bbl to 208.1 million bbl.

US refineries ran at 82.5% of total capacity on average, a drop of 2.2% from the previous week. Distillate inventories rose by 700,000 bbl to 136 million bbl.

Separately, in its report on US natural gas inventories in underground storage, EIA reported a withdrawal of 143 bcf to 2.88 tcf for the week ended Dec. 26. The level was above the 5-year average of 2.82 tcf but lags last year's storage level of 2.95 tcf for the same period.

Pritchard Capital analysts said, "The gas market seems poised to reset itself," in a process that includes shutting in some production and a more than a 30% drop in the number of active land rigs in the US. They see "a 4-6 month lag time before recent well decline rates translate into production volume decreases," adding, "We may see gas prices around $5/Mcf before things get better."

They also perceive a shift from a supply-constrained market to a demand-constrained market for LNG. "Global LNG prices on the spot market seem to be stabilizing [at] $8-9/MMbtu in the Atlantic Basin and in the $11-12 range in the Pacific Basin." With prices at the Henry Hub, La., spot market "well below the prices a year ago," LNG terminals at Lake Charles, La., and at Sabine Pass and Freeport in Texas remain inactive, analysts said.

(Online Jan. 5, 2009; author's e-mail: paulad@ogjonline.com)

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