MARKET WATCH: Crude prices waffle in mixed market

Sam Fletcher
Senior Writer

HOUSTON, Feb. 2 -- Crude futures prices continued to waffle Jan. 30 with near-month contracts for March and April increasing by a few cents while subsequent monthly contracts were down but still in contango through the first quarter and beyond on the New York market.

Still, Olivier Jakob at Petromatrix, Zug, Switzerland, noted the March contract for benchmark US crude lost $4.72/bbl during the week. North Sea Brent in the same week was down $2.49/bbl on the International Petroleum Exchange in London. Petroleum products prices held their prices better, with the March heating oil contract down just 67¢/bbl and the reformulated blend stock for oxygenate blending (RBOB) up $3.46/bbl. Natural gas dropped by 1.9% during the week, including a loss Jan. 30.

In Houston, analysts at Raymond James & Associates Inc. said, "While oil traded roughly flat Jan. 30, natural gas prices fell 3.5% and helped pull energy stocks lower along with the broader market. Looking forward, oil prices are down this morning as weak demand continues to lead to an unbalanced market."

Nevertheless, analysts at Pritchard Capital Partners LLC in New Orleans, said, "Crude oil prices appear to be in the early stages of a bottoming process."

Members of the Organization of Petroleum Exporting Countries are "moving forward diligently" with production cuts below their cumulative quota of 24.8 million b/d, said Pritchard Capital Partners. The 11 OPEC countries participating in the output reduction are expected to produce 23.6 million b/d in the 4 weeks ending Feb. 14, down from 23.7 million b/d in the 4 weeks through Jan. 17.

Natural gas outlook
Feb. 2 is observed in the US as Groundhog Day when weather predictions for the rest of the winter are made on the basis of whether or not a groundhog can see his own shadow. Although Raymond James analysts refrained from guesses about the weather, they reported, "We do foresee 6 more months, not weeks, of deteriorating natural gas prices."

Gas prices continued to fall in early trading Feb. 2 "largely driven by further evidence of declining industrial demand," said Pritchard Capital Partners. The partnership noted earlier reports that US gas production increased by 3.49 bcfd in November "despite 2.2 bcfd of hurricane shut-ins."

They reported, "Natural Gas prices have declined sharply to multiyear lows as demand destruction appears to be outpacing any slowdown in domestic supply growth…. With the US land rig count down 28% in the last 5 months, we point to mid-2009 time period for the decline curve and lower drilling activity to catch up and correct the supply-demand balance."

Raymond James analysts said they now expect a 60% drop in the US rig count this year, compared with their prediction of a 40% cut just 2 months ago. The bigger reduction will include a 65% roll-back in the number of rigs drilling for gas and a 50% cut in the number drilling for oil.

"Our new estimated bottom for the US rig count should be around 800 rigs with the bottom being early fourth quarter," said Raymond James analysts. However, they said US production likely will not fall "as fast or as far" as the rig count.

"Producers will stop drilling their least productive, least economic wells first. When we account for the highly productive shale wells and consider that horizontally drilled wells (the most productive) are being dropped from drilling programs at a much slower rate, we find that gas production will probably not fall as fast or as far as the rig count (in percentage terms)," they said.

Meanwhile, Raymond James analysts said, "We do not think a 60% decline in the rig count is priced into the stocks for North American gas-driven companies. Likewise, we still do not believe the magnitude of the gas markets supply and demand problem is priced into US natural gas prices. While we think a late 2009 gas price and stock price rally may still be in the cards, asset utilization rates and North American service company earnings should be down year over year in both 2009 and 2010."

Despite a short rally in the equity markets at the start of January, closing prices on Jan. 30 "represented the worst January ever for [corporate] stocks, with the broader market falling over 8% for the month," after the US economy contracted in the fourth quarter "at the fastest pace in nearly 27 years," Raymond James reported.

However, Pritchard Capital Partners said, "The energy sector outperformed the broad [equity] market handily in the month of January, after underperforming in 2008." The relatively stronger January performance by energy companies "occurred in the face of weakening oil and gas prices, as natural gas prices declined by 22% and crude oil prices declined by 10.4%" for the prompt month contracts, they said.

In other news, the American-Statesman newspaper in Austin, Tex., recently reported that Austin Energy, the city's electric utility, wants to set aside 300 acres it owns for a solar array to be built and owned by San Francisco-based Gemini Solar Development Co. Austin Energy would be the exclusive client, paying $10 million/year for 25 years for the power generated by the array.

The proposed 30-Mw photovoltaic (PV) power plant would be larger than the biggest existing US PV plant at Nellis Air Force base in Nevada, which generates 14.2 Mw. The Austin facility would produce enough energy to power as many as 5,000 homes, said utility officials, and could open in late 2010. The newspaper reported that the utility claimed the proposed plant would increase the average Austin homeowner's monthly electric bill by only 60¢. However, large manufacturers in the area served by the utility fear a much larger leap in their electricity costs.

Energy prices
The March contract for benchmark US light, sweet crudes gained 24¢ to $41.68/bbl Jan. 30 on the New York Mercantile Exchange. The April contract increased 9¢ to $46.13/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 24¢ to $41.68/bbl.

In London, the March IPE contract for North Sea Brent crude advanced by 48¢ to $45.88/bbl. Brent crude historically has traded at a 3-5% discount to WTI. However, Raymond James analysts reported, "Since the beginning of 2009, this trend has reversed, with Brent oil…trading 10% higher than WTI [on Jan. 30]. We believe this is largely driven by higher than average inventory levels in the US, including at Cushing, the hub from which WTI is sold. In addition, the current contango forward strip is exacerbating the situation with a contract for WTI delivery in August 2009 trading at $52.07/bbl…thereby encouraging storage. We do not expect this differential to narrow materially as long as US inventories remain high."

Heating oil for February increased 2.55¢ to $1.45/gal on NYMEX. RBOB for the same month was up 3.8¢ to $1.27/gal.

The March natural gas contract dropped 15.9¢ to $4.42/MMbtu Jan. 30 on NYMEX. On the US spot market, gas at Henry Hub, La., lost 6¢ to $4.76/MMbtu.

On IPE, the February contract for gas oil gained $6.50 to $449.50/tonne.

The average price for OPEC's basket of 12 reference crudes increased 83¢ to $42.04/bbl on Jan. 30. So far this year, the OPEC basket price has averaged $41.52/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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