MARKET WATCH: Cold weather pushes up oil, gas prices

Sam Fletcher
Senior Writer

HOUSTON, Dec. 21 – The crude price continued to climb Dec. 18 on the New York market, rising 5% for the week in its first weekly gain in more than a month and was still advancing in early trade Dec. 21 despite a strengthening dollar.

“Separately, natural gas prices are inching closer to the $6[/MMbtu] mark this morning,” said analysts in the Houston office of Raymond James & Associates Inc. “Weather continues to provide upward support for prices after a major winter storm blanketed the Northeast over the weekend. Demand could remain elevated as the National Weather Service's 8-14 day outlook for Dec. 28-Jan. 3 is calling for below-average temperatures across the eastern third of the country.”

They noted, “The front-month crude contract rolls to February delivery today after the market close. Meanwhile, analysts expect ministers of the Organization of Petroleum Exporting Countries to decide to keep production flat at their Dec. 23 meeting in Angola.

On the other hand, the Movement for the Emancipation of the Niger Delta (MEND) claimed responsibility for an explosion early Dec. 19 on a crude pipeline in the southern Rivers State of Nigeria.

In other news, Iraq’s ambition to boost its oil production to 12 million b/d by 2016 from its current 2.5 million b/d is “totally unrealistic,” said Raymond James analysts. “If you believe this target, we have some beachfront property in Fallujah to sell to you. It's not just the enormous geological, petrophysical, infrastructure, and (last but not least) security hurdles that must be overcome to achieve such a best-best-case scenario. There is also the fact that the Iraqi government has very little leverage at its disposal to force international oil companies to attain these targets. Given how stingy the fiscal terms of the contracts are, the reality is that foreign operators don't have much incentive to expend the vast amounts of capital required to make their numbers.”

The introduction of advanced technology and operating expertise should allow Iraq to grow production over the next decade; however, an increase to 4-5 million b/d “seems more realistic if everything goes right in Iraqi politics,” Raymond James analysts said. “More importantly for near-term oil prices, most of this growth is likely to be significantly back-end-loaded (beyond 2012). In other words, do not assume that increasing Iraqi oil production kills the bull case for oil anytime soon.”

Copenhagen ‘irrelevant’
Raymond James analysts predicted 2 weeks ago the UN climate change conference in Copenhagen would prove “a non-event” for energy markets. However, they said, “Even we were surprised by how utterly irrelevant the conference—which ended [Dec. 19]—turned out to be.”

Proponents had hoped participants in the Copenhagen conference would at least approve a strong political framework agreement that could be converted into a binding treaty within 6-12 months. But as the process dragged on, it became clear no legally binding treaty would emerge. Instead the “so-called ‘Copenhagen Accord’ was agreed at the eleventh hour [on Dec. 18, the originally scheduled final day of the meeting] by the leaders of five major economies—the US, China, India, Brazil, and South Africa,” Raymond James reported. “It was then half-heartedly endorsed by most other delegations. To call this agreement toothless is an understatement. It is not a direct precursor to a binding treaty, but rather a bland declaration that is so common at international gatherings (G-8, Commonwealth, the Association of Southeast Asian Nations, etc.). The agreement lacks two crucial elements that were expected ahead of the conference: (1) a firm target for reducing carbon emissions by a specified date, either for individual countries or groups of countries (say, 50% by 2050); and (2) a deadline for converting the agreement into a treaty (say, 12/31/10).”

The analysts explained, “Quite simply, none of the major players showed the political will to make the necessary compromises. From the first day of the conference, it was clear that the level of trust between the industrialized world and the developing world was lacking. This lack of trust manifested itself on all the core issues: (1) which countries would be required to make emissions cuts; (2) what the magnitude of those cuts would be; (3) whether the cuts would be subject to international monitoring; and (4) how much funding wealthy countries would provide to support clean energy in developing countries. And within the developing camp, there was also a high-profile division between the major emerging economies and the smaller, poorer countries (especially island nations).”

The Copenhagen Accord says countries will formally announce their emissions cut pledges by the end of January. These pledges will be registered with the UN, but they will not be legally binding under international law, although they can be binding under domestic law. “Most of these announcements have already been made, so this process is more or less a formality. Beyond that, the next UN climate conference will take place in Mexico in November-December 2010,” Raymond James analysts said. “Although it is theoretically possible that a binding treaty will be reached a year from now, it is highly unlikely. The Copenhagen Accord calls for a review of the agreement by 2015—in other words, don't hold your breath.”

In a separate report, analysts at the Centre for Global Energy Studies, London, observed oil market fundamentals have weakened over the past month, as economic recovery in the industrialized countries has faltered. Stock draws expected in the fourth quarter have not yet materialized, while inventories continue to rise. “Although we still expect global oil demand in the current quarter to record its first year-on-year increase since the second quarter of 2008, the rate of growth now appears likely to be lower than we thought a month ago,” said CGES analysts. Oil demand is still falling among members of the Organization for Economic Cooperation and Development (OECD), and weakening fundamentals “may now be exerting downward pressure on oil prices, which have fallen by around $6/bbl (7.5%) since the start of the month,” they said.

CGES said, “The frailty of the economic recovery in the developed countries of the
OECD has been highlighted in recent weeks. Industrial production in the Eurozone fell in October for the first time for 6 months, while unemployment outside the public sector continued to rise. Across the Atlantic, though, US industrial output posted a 0.8% increase in November, but this has done little to boost oil demand. The latest weekly data from the Department of Energy show US middle distillate demand in the first 50 weeks of 2009 down 15% from the 2007 level, while comparing only the most recent 6 weeks shows demand down almost 20%. Gasoline has fared somewhat better, but US demand for this product is still almost 5% down on the 2007 levels.”

On the other side of the oil balance, they said, “Supplies have been growing more strongly than anticipated earlier in the year. The recovery in oil prices has helped Russian companies to limit the output declines in West Siberia, allowing new fields to more than offset the losses, while production from the Caspian Sea has also been growing steadily. Rising US, Brazilian, and Colombian production has helped to lift non-OPEC oil supplies this year by around 570,000 b/d compared with 2008. Additional OPEC NGLs and Iraqi crude oil, which are not restricted by [OPEC’s] quota system, have helped to raise annual average non-quota-controlled output by nearly 1.1 million b/d in 2009. Meanwhile, OPEC’s quota discipline has been slipping, and output from the OPEC-11 is now nearly 800,000 b/d higher than in March, when compliance was at its best.”

Energy prices
The January contract for benchmark US light, sweet crudes gained 71¢ to $73.36/bbl Dec. 18 on the New York Mercantile Exchange. The February contract increased 34¢ to $74.42/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 71¢ to $73.36/bbl. Heating oil for January delivery dipped 0.07¢ but was essentially unchanged at an average $1.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 4.28¢ to $1.89/gal. The January contract for natural gas advanced 1.4¢ to $5.78/MMbtu on NYMEX.

In London, the February IPE contract for North Sea Brent gained 38¢ to $73.75/bbl, still leading WTI. Gas oil for January climbed by $3.50 to $595.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes inched up 1¢ to $71.78/bbl on Dec. 18. So far this year, OPEC’s basket price has averaged $60.63/bbl, down from an average $94.45/bbl for all of 2008.

Contact Sam Fletcher at samf@ogjonline.com.

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