MARKET WATCH: Crude prices remain up for the week

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 23 -- The expiring April crude oil futures contract dipped lower Mar. 20 but still finished 10.4% higher for the week, while the new front-month May contract closed just above $52/bbl, up $4.97/bbl for the week.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "Crude prices have acted very well over the last month, increasing by 30% or $12/bbl.

Crude and natural gas prices were poised to move higher Mar. 23 in anticipation US Treasury Secretary Timothy Geithner would detail the government plan to buy $500 billion of toxic assets by utilizing resources from the $700 billion bailout fund, the Federal Deposit Insurance Corp., and the Federal Reserve. "The plan calls for private investors to buy the assets with the government providing subsidies and taking on much of the risk. If the arrangement works as planned, it could potentially be expanded to $1 trillion over time," said analysts in the Houston office of Raymond James & Associates Inc.

Although it strengthened some on Mar. 20 against the euro and the yen, the US dollar experienced its biggest single-week decline on the dollar index since 1985. A weak dollar usually means higher oil prices.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Consensus oil price forecasts stand near $50/bbl for 2009 and $65/bbl for 2010. We remain more comfortable with prices near $45/bbl in 2009 and $55/bbl in 2010. A sharp recovery in oil prices toward $80/bbl in 2011 remains possible, but is highly dependent on a strong economic revival starting in 2010."

Natural gas outlook
The number of rigs drilling for natural gas in the US fell by 27 to 857 last week—"the lowest level since May 2003," said Pritchard Capital Partners.

The total 47% drop in Baker Hughes Inc.'s rig count from the 2,031-rig peak last September "exceeds the pace of past downcycles, as the rig count was down 38% in the mid-1980s, 9% in 1997-98, and 33% in 2001-02, after the first 27 weeks from the peak," Pritchard Capital analysts said. In the near term, they said, "We expect the number of idled rigs to decelerate from the recent trend of 40-50 net rigs/week. We reiterate our belief that the current downturn will reach a trough of 800-1,000 rigs, down 50-60% from the peak, and that this could occur as early as the second quarter. Most land drillers have risen substantially on the back of crude rallying [above] $51/bbl and natural gas [above] $4/MMbtu [on the New York futures market]. Over the past 2 weeks, the less diversified contractors with the least-advanced fleets have outperformed."

Raymond James analysts see further downside in gas prices "heading into the seemingly certain scenario of production shut-ins this summer." They said, "Historical precedent—the pullbacks of 1997-99 and 2000-02—has shown that gas-weighted stocks bottom very close to the bottom in gas prices. While this may not seem like an altogether earth-shattering revelation, it's precisely the reason we remain bearish on the group in the near-term. We believe not only are we headed to sub-$3/Mcf gas prices but that consensus earnings estimates and rig count forecasts have further room to fall."

In other news, Raymond James said workers at Brazil's state-operated Petroleo Brasilerio SA (Petrobras)
began a 5-day strike to dispute bonuses and make safety demands.

Energy prices
The expiring April contract for benchmark US light, sweet crudes dropped 55¢ to $51.06/bbl as investors balanced buy-sell positions to avoid delivery requirements on the New York Mercantile Exchange. The new front-month May contract inched up 3¢ to $52.07/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was still matching the April futures market price, down the same amount to the same level. Heating oil for April delivery gained 2.71¢ to $1.38/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) advanced 1.97¢ to $1.46/gal. Heating oil finished the week higher by $7.78/bbl, while RBOB was up $4.22/bbl.

Natural gas for the same month gained 7.8% during the week, climbing 5.3¢ to $4.23/MMbtu Mar. 20 on NYMEX. On the US spot market, gas at Henry Hub, La., popped up 16¢ to $3.98/MMbtu. Pritchard Capital analysts said, "Gas markets have tightened vs. early January, likely the result of lower residual oil demand (switching), higher NGL prices (ethane rejection has likely picked up), and more coal substitution at the margin in both the East and, potentially ERCOT [the Electric Reliability Council of Texas Inc.]. The decline in gas-directed rig counts (vertical and directional) since July has been far more significant than most had predicted."

However, they cautioned, "LNG imports remain a concern, and growth may surpass 20% year-over-year in the first quarter, according to Waterborne LNG, as declining demand in Asia leaves more imports available for export to US markets. The call that seems to be getting more and more credence is that imports will exceed 3.5 bcfd this year while peaking at 5 bcfd by yearend."

In London, the May IPE contract for North Sea Brent crude rose 55¢ to $51.22/bbl, up $5.34/bbl during the week. Gas oil for April gained $8 to $435.75/bbl.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $1.38 to $48.77 on Mar. 20. So far this year, OPEC's basket price has averaged $42.17/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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