MARKET WATCH: Crude jumps 11% on hopes for an OPEC cut

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 13 -- The front-month crude futures contract jumped 11%, topping $47/bbl on the New York market, on speculation the Organization of Petroleum Exporting Countries will approve a fourth production cut at its Mar. 15 meeting in Vienna.

That rally after earlier losses "was not purely a crude oil exercise," according to Olivier Jakob at Petromatrix, Zug, Switzerland. "Global markets reacted positively to the better-than-expected US retail sales data for February, which was (excluding cars and gasoline) up 0.5% from January and down 0.6% from a year ago," he said. Although the year-ago comparison is still negative, the latest data are "up 1% from February 2007 while the equity markets are at the levels of 1997," he said.

Jakob said, "OPEC has been sending during the week multiple and contradictory sound bites (including the now-usual Russian pre-meeting quote of "we might look to join") to test the market reaction, and the answer seems to be quite clear: a cut and we will try to take over the $50/bbl resistance, no cut and we just cruise on the $40-50/bbl highway."

In Houston, however, Raymond James & Associates Inc. analysts warned, "Unlike other recent OPEC meetings, another production quota reduction is expected to be intensely debated." Saudi Arabia has reduced its own production below its allotted quota and is urging better compliance by other OPEC members prior to any more cuts. Algeria, Iran, and Venezuela are the primary hawks calling for greater production cuts to drive up prices.

However, they are among the worst offenders in failing to comply with current reduction agreements, which weakens their position in favor of more cuts. Algeria is estimated to have made only 50-60% of its mandated reduction. Iran is producing some 400,000 b/d above its quota level, and Venezuela's overproduction is running 225,000 b/d, said the Centre for Global Energy Studies (CGES), London (OGJ Online, Mar. 11, 2009).

Another factor: Several OPEC members are managing large sovereign wealth funds built up when oil prices were higher. A rise in oil prices would further weaken the world economy and adversely affect the diversified investment of sovereign funds beyond commodities. Analysts at Pritchard Capital Partners LLC, New Orleans, said, "Qatar's sovereign wealth fund has put buying on hold for the next 6 months and will overhaul its strategy to focus more on energy and commodities. In the next 6 months the fund, which is estimated to have assets of $60 billion, will do nothing, and in the second half of the year they intend to switch their focus to commodities, in particular, food, energy, and water. In the short term the fund will continue to hold US dollars but is unsure of their long term intentions."

Jakob said: "Pricewise, we are currently at a very important crossroad, which would be a golden opportunity for OPEC to finally turn the market around without having to make too great of an additional effort. The crude oil contango has fallen sharply to levels which will translate in further draws from stocks in floating storage and in Cushing, Okla. The product cracks are under severe pressure which will translate in poor levels of refinery utilization, which in turn will make for draws in stocks of products. The poor refinery crack also means that a higher crude oil price does not necessarily mean a higher price for the consumer until the product stocks are drawn. The outlook from the [world supply and demand] balances does not provide a clear picture that a further OPEC cut is actually needed, which also means that OPEC has the possibility of announcing a cut and take 1 month to see if they really want to implement it while they really concentrate on complying to the production levels set in Oran (this would amount to OPEC maintaining about the same 'compliance level' as today but with an higher amount of oil taken out of the market)."

OPEC's outlook
In its monthly market report for February that was released Mar. 13, OPEC said its basket of 12 reference crudes remained broadly unchanged last month, declining a marginal 17¢ to $41.35/bbl. The average price for OPEC's basket remained relatively steady into March to $42.14/bbl on Mar. 12, down 56¢ from the previous day.

The organization revised its estimate of global economic growth for 2008 down to 3.1% from 3.3%, while the 2009 forecast was lowered to show a contraction of 0.2% from the previous prediction for positive growth of 0.4%. "The changes are mainly due to downward revisions in all world regions, in particularly Organization for Economic Cooperation and Development countries, with the exception of China and India. Although the US stimulus package has been approved, it is still unclear when and to what magnitude the impact will be felt," said OPEC officials.

Meanwhile, they noted key Asian countries are suffering large declines in exports. China exports declined 25.7% from year-ago levels in February, extending the 17.5% decline in January.

OPEC lowered its projection of 2008 world oil demand growth down 100,000 b/d to a negative 300,000 b/d. The 2009 forecast was cut 400,000 b/d to a negative 1 million b/d. "The revisions take into account the continued deterioration in the world economy and the accompanying erosion in demand growth," OPEC reported. "Negative growth is expected to extend across all regions except the Middle East and China. OECD is expected to decline by 1.3 million b/d while non-OECD is projected to increase by only 300,000 b/d."

It estimated non-OPEC oil supply fell 200,000 b/d in 2008, broadly unchanged from OPEC's last report. In 2009, non-OPEC oil supply is projected to increase 400,000 b/d over 2008, following a downward revision of 200,000 b/d from the last assessment.

Demand for OPEC crude in 2008 was estimated at 30.9 million b/d, down 500,000 b/d from 2007. In 2009, the demand for OPEC crude is expected to average 29.1 million b/d. OPEC's production declined 700,000 b/d in February, according to secondary sources. OPEC NGLs and nonconventional oils are expected to average 4.8 million b/d in 2009, an increase of 400,000 b/d from the previous year.

OPEC reported, "Refinery glitches and gasoline stock draws especially in the US have temporarily provided support for the light distillates market, lifting the gasoline crack spread across the globe. With the approaching end of the winter season, refiners will be able to switch operations in favor of gasoline and thus remove any perceived tightness in gasoline supply. Such circumstances along with increasing spare refining capacity should exert pressure on refining margins. Lower refining margins are likely to encourage refiners to cut runs, which could impact demand for crude in the coming months."

IEA outlook
The International Energy Agency in Paris reported Mar. 13 a steady gain in crude prices through early March on mounting evidence of increased OPEC compliance with targeted output cuts (OGJ Online, Mar. 13, 2009). "Benchmark crudes scaled to 2-month highs, trading in a $41-45/bbl range, with West Texas Intermediate back above North Sea Brent for the first time since late 2008," IEA said.

It estimated global oil supply in February at 83.9 million b/d, down 1 million b/d month-on-month and 3.4 million b/d year-on-year. OPEC supplied 28 million b/d, down 1.1 million b/d from January. "Full compliance with agreed cuts—above the current 80%—would take OPEC output 1.6 million b/d below the 2009 'call,' implying a potential draw in OECD stocks," IEA said.

It revised its estimate of non-OPEC supply growth for 2009 down by 380,000 b/d to zero, "following a reappraisal of ongoing problems at Azerbaijan's ACG fields." Its estimate of 2008 non-OPEC supply remained steady at 50.6 million b/d, as fourth quarter upward revisions to UK North Sea production were offset by weaker non-OECD output. OPEC NGLs, however, should add 300,000 b/d in 2009, officials said.

IEA revised its 2009 global oil demand forecast down slightly to 84.4 million b/d on reassessment of demand prospects in the former Soviet Union, Asia and OECD North America. The oil demand estimate for 2008 remains unchanged at 85.7 million b/d.

Energy prices
The April contract for benchmark US light, sweet crudes climbed $4.70 to $47.03/bbl Mar. 12 on the New York Mercantile Exchange. The May contract gained $3.98 to $47.97/bbl. Contract prices for subsequent months increased and remained in contango through at least April 2010. On the US spot market, WTI at Cushing followed the front-month futures contract, up $4.70 to $47.03/bbl. Heating oil for April delivery increased 9.33¢ to $1.23/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) advanced 9.45¢ to $1.35/gal.

Natural gas for the same month jumped by 19.7¢ to an average $4/MMbtu on NYMEX after the Energy Information Administration reported a larger-than-expected withdrawal of gas from US underground storage in the week ended Mar. 6. That jump "was the largest positive move in natural gas prices in nearly 10 weeks," said Raymond James analysts.

However, US gas inventory remains 19.2% above the 5-year average and 13.3% above year-ago levels. While the latest draw was positive for the market, Pritchard Capital Partners said, "For natural gas to sustain a rally the market will need evidence that the rig reductions are starting to create a supply response, and the current total inventory levels do show no sign of a supply response yet." Meanwhile, on the US spot market, gas at Henry Hub, La., dipped 1.5¢ to $3.86/MMbtu.

In London, the April IPE contract for Brent crude gained $3.69 to $45.09/bbl. The March gas oil contract was unchanged at $363.50/tonne.

Contact Sam Fletcher at

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