MARKET WATCH: Oil prices decline; gas futures advance

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 5 -- The front-month contract price for benchmark US crudes fell 1.4% in the New York market Oct. 2 on news that unemployment rose to a 26-year high of 9.8%, “indicating that the $800 million federal stimulus package may not be working to create jobs as quickly as expected,” said analysts in the Houston office of Raymond James & Associates Inc.

The US Department of Labor reported nonfarm payrolls fell by a greater-than-expected 263,000 in September, the 21st consecutive month of job losses (OGJ Online, Oct. 2, 2009). Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The nonfarm payroll number…showed a pause in the recent improving trend while the picture on revisions were mixed (July unemployment was revised up 28,000 and August revised down 15,000). The momentum on equities is waning, and the paradox of the modern world of computed correlated markets is that the equity markets can not really afford a price correction in the oil markets as it would then put the equity recovery at risk.”

In New Orleans, analysts at Pritchard Capital Partners LLC noted the US dollar and US treasuries also declined on the weaker-than-expected employment figures. “In the past, bad US macroeconomic data has buoyed the dollar and treasuries. Perhaps the price action in the dollar and treasuries are first signs that the dollar may be losing some of its ‘flight to safety’ status, as the bad macro data implies the US will need to maintain low interest rates and continue deficit spending for longer than expected. If that is the case and the dollar continues to weaken, crude could rally in the coming weeks,” they said.

The rebound in natural gas futures prices “was driven by expectations of a colder winter. One forecaster is predicting the Northeast will have the coldest winter in a decade,” said Pritchard Capital Partners.

The fact Key Energy Services Inc. (KEG) executives recently reduced their profit guidance in a conference with industry analysts also may have contributed to the strength in natural gas. “In past cycles, well servicing companies tend to see an increase in E&P activity prior to other segments of the oil services business simply because it is less expensive to make an existing well more productive then to drill a new well,” said Pritchard Capital analysts. “The fact KEG is not seeing an increase may indicate that the drop in activity is so severe it may lead to an even greater reduction in natural gas supply in 2010 than the market is currently forecasting.”

Still the spread between the natural gas cash market hubs and the New York futures market continues to widen. “Every hub in North America with the exception of the Ellisburg, [Pa.,] Hub is below $3/Mcf—most are below $2.50/Mcf—yet the November contract continues to rise [on the New York Mercantile Exchange]. This could be a simple short squeeze brought on by E&Ps selling natural gas productions at the hubs and then buying back their hedges on the NYMEX. If NYMEX natural gas continues to trade [at current or higher levels] above the hubs, then hedging with NYMEX will lose some of its effectiveness,” said Pritchard Capital Partners.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said oil and gas market fundamentals still look dire. Energy Information Administration data last week showed a fresh rise in distillate stocks, while natural gas storage hit a record high of 3.589 tcf. “Further rises are expected towards 3.9 tcf, the level of peak storage capacity. The EIA predicted consumers will save money on their utility bills this winter because of the weak economy and plentiful fuel supplies,” they said.

Distillate stocks including heating oil hit 171 million bbl in the week ended Sept. 25, with heating oil at the highest level since February 2007. Distillate demand in the US has plummeted as trucking and industrial use of diesel declined during the recession. “Such high stocks make it unlikely that middle distillate cracks will recover much unless there is an unusually cold winter,” KBC analysts said.

Geopolitical premiums
Meanwhile, militants in Nigeria appear to be accepting the government’s amnesty agreement, easing tensions that have long disrupted oil production in that country. Jakob said, “We started last week with the need to price some geopolitical premium for Iran and Nigeria. We start this week…knowing that the ‘Iranium’ meetings were ‘constructive’ and that most warlords in the Nigerian Delta have embraced the amnesty. This should make for a considerable lower geopolitical premium to be priced in the crude oil markets.”

Jakob said, “If more stability does indeed come to the Nigerian Delta, then this could start to become a game changer for the Atlantic Basin crude oil markets as better flows from Nigeria should also improve some of the refining yields on light products and will put the Middle Eastern producer under more pressure.”

US President Barack Obama joined representatives from Russia, China, France, the UK, and Germany in talks with Iranian officials Oct. 1 in Geneva, where he said, “We have made it clear that we will do our part to engage the Iranian government on the basis of mutual interests and mutual respect, but our patience is not unlimited (OGJ Online, Oct. 2, 2009).”

However, Raymond James analysts said, “Based upon the recent political rhetoric, we now think the risk of an Iranian oil supply interruption is meaningfully higher than it was a few months ago. In fact, we now believe there is better than a 50% probability that some type of military confrontation with Iran will occur in the course of the next 12 months.”

The analysts noted an “interesting article” from the New York Times over the weekend citing “a leaked internal report from the International Atomic Energy Agency that says Iran has essentially worked out all of its technical issues to build a nuclear weapon.” They said, “The only remaining step is enriching a sufficient quantity of weapons-grade uranium, which Western intelligence sources believe to be a matter of months if enrichment continues at the current pace.”

Raymond James analysts said: “In the past 2 weeks, the risk of an Iranian oil supply disruption has increased sharply while the oil markets seem to have completely ignored the potential change to the global oil supply-demand equation. Normally during geopolitical crises involving the Middle East, oil prices take notice well before military action actually begins. This was the case, for example, in the run-up to war with Iraq in 2003. In fact, the same was true in early 2006, when Iran announced the end of its moratorium on nuclear enrichment. But here we are, in the midst of what some are calling ‘a Cuban Missile Crisis in slow motion,’ with the Iranian regime playing hardball and tensions palpably rising in the region, and the oil market just yawns.”

Analysts at Deutsche Bank AG raised their 2010 oil price forecast to $65/bbl from $55/bbl due to continued production discipline among members of the Organization of Petroleum Exporting Countries, combined with a somewhat tighter supply-demand balance.” However, they said, “We believe economic headwinds in the middle of next year could still create trouble.”

In other news, Raymond James analysts reported the final US climate bill is not likely anytime soon. The White House's top energy advisor signaled Oct. 2 the Democratic leadership doesn't expect the Waxman-Markey climate bill to be passed ahead of the international climate summit in Copenhagen in December. “Not only must the climate bill wait out the health care debate currently consuming Washington, but with the 2010 midterm elections next year, the bill may be pushed out much further,” they said.

Energy prices
The November and December contracts for benchmark US light, sweet crudes lost 87¢ each on Oct. 2, closing at $69.95 and $70.33/bbl, respectively, on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 87¢ to $69.95/bbl. Heating oil for November delivery dropped 3.06¢ to $1.80/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 1.7¢ to $1.74/gal.

The November contract for natural gas, however, climbed 25.2¢ to $4.72/MMbtu on NYMEX. Deutsche Bank analysts said, “US natural gas production is finally showing signs of weakness after the remarkable rise of 2007-08. The toll of lower rig counts, rapid decline rates, feeble demand, full storage and low prices is finally showing up in sinking production growth rates. We believe this will help rebalance the markets.” Nevertheless, gas at Henry Hub, La., fell 38¢ to $2.52/MMbtu.

In London, the November IPE contract for North Sea Brent was down $1.12 to $68.07/bbl. Gas oil for October dropped $8.75 to $554.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost 55¢ to $67.15/bbl. So far this year, the OPEC basket price has averaged $56.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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