MARKET WATCH: Cold wave fans oil demand, raises energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 30 -- Crude prices continued climbing Dec. 29 in the New York market as a cold wave penetrating the southeastern US is expected to intensify over the New Year holiday weekend and into next week.

“Crude oil hit a 5-week high as Iran renewed accusations of US meddling and detained over 1,000 protesters, closing up 0.1% as a strengthening dollar limited gains,” said analysts in the Houston office of Raymond James & Associates Inc. “Separately, natural gas…fell 2.3%, despite a report from AccuWeather.com [in State College, Penn.,] showing that a cold arctic wave is expected to keep things chilly through February.”

Jim Andrews, AccuWeather.com’s expert senior meteorologist, predicted major US cities will be chilled, fanning demand for “more and longer” home heating this winter. In the coldest periods, metropolitan areas in the Northeast US and as far south as Atlanta will see daytime highs “in the 20s,” he predicted. The cold pattern is not expected to break anytime soon, and AccuWeather.com meteorologists are forecasting bitter cold temperatures for the plains states as well. They said a weather pattern around Greenland is responsible for the cold burst encompassing a massive portion of the US and Europe.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “With the cold weather in the US, heating oil was leading the oil complex yesterday and made for a strong increase in the heating oil crack but as well a reduction in the heating oil contango.”

Retail gasoline sales at the pump were down 3.3% from the previous week, according to the latest MasterCard Spending Pulse report, “as filling the tank before the storm was replaced by not driving during the storm,” said Jakob. “On the 4-week average, sales at the pump are higher by 1.6% from last year.”

Jakob said, “The dollar index was relatively well supported; that did not have much of an impact on crude oil, but it moves West Texas Intermediate in the massively overbought territory in our euro-dollar correlation model by as much as $6/bbl. Based on the euro-dollar value, WTI should be around $71.60/bbl rather than $78.60/bbl.”

He said, “The problem is that when WTI starts the year at already such high flat price levels, then swap dealers and sponsors of indices have to push up the crude value to more extreme levels to maintain a positive return in the indices. In 2008, crude oil prices were pushed above $140/bbl, but the result was a supply and demand reaction that triggered a very severe price correction downward. Starting the year with WTI around $80/bbl and with a contango, a push above $100/bbl will be necessary to prevent the indices from printing negative returns in 2010, but the risk will then be again to see a supply and demand reaction that will then trigger a severe price correction.”

Meanwhile, Raymond James analysts said, “We continue to see at least a 50% chance of airstrikes against Iran over the next 9-12 months, and events in the past 3 months reaffirm this view. [Dec. 31] marks the formal deadline for Iran to agree to a compromise on enriching uranium outside the country, but comments from top officials indicate outright rejection of the offer. Whether or not Iran's refusal will lead to UN-backed sanctions may be a moot point, because even meaningful sanctions are unlikely to dissuade the regime from its nuclear ambitions. And Iran's current political situation—with security forces escalating violence against street protests in recent weeks—makes a compromise on the nuclear issue even less likely, because the regime is fearful of appearing weak by making concessions to the West.”

US inventories
The Energy Information Administration reported Dec. 30 commercial US crude inventories dropped 1.5 million bbl to 326 million bbl in the week ended Dec. 25, less than Wall Street’s consensus of a 1.9 million bbl decline. Gasoline stocks decreased 300,000 bbl to 216 million bbl, in contrast to analysts’ expectations of a 1 million bbl increase. Distillate fuel inventories fell 2 million bbl to 159.3 million bbl, slightly less than the expected 2.2 million bbl loss.

Imports of crude into the US increased 320,000 b/d to 8 million b/d during the same week. Over the 4 weeks through Dec. 25, US imports averaged 7.9 million b/d, down 1.6 million b/d from the comparable 4 -week period in 2008.

Input of crude into US refineries was up 102,000 b/d to 13.9 million b/d last week with units operating at 80.3% of capacity, EIA said. Gasoline production increased to 9 million b/d, and distillate fuel production decreased to 3.7 million b/d.

Using a different basis for calculation, the American Petroleum Institute earlier reported commercial US crude inventories climbed by 1.7 million bbl to 330.5 million bbl in the week ended Dec. 25. It said gasoline stocks dropped 1.4 million bbl to 214.5 million bbl, while distillates fell 3.5 million bbl to 161.6 million bbl. API reported US refining capacity dipped to 78.2%.

In other news, EIA’s latest Form 914 report put domestic natural gas production in the Lower 48 up 1.1 bcfd to 62.9 bcfd in October, with gas prices were nearly $1/Mcf higher than in September. “We believe much of the supply shut in last month (1.5 bcfd) came back online in October. …However, the magnitude of the increase was a bit surprising, and it seemed to catch the market off guard as well (natural gas down 20¢/Mcf yesterday). Since peaking in February, hurricane-adjusted production has averaged a decline of only 200 Mcfd/month. Given the surging rig count, we believe supply will not fall as far or as fast as consensus expects in 2010.”

Energy prices
The February contract for benchmark US sweet, light crudes gained 10¢ to $78.87/bbl Dec. 29 on the New York Mercantile Exchange. The March contract was up 14¢ to $79.59/bbl. The closing US spot market price for WTI at Cushing, Okla., was unavailable, however. Heating oil for January delivery increased 2.93¢ to $2.10/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dipped 0.78¢ to $2.01/gal.

The January natural gas contract rose as high as $6.04/MMbtu in intraday trading before closing at $5.81/MMbtu, down 17.6¢ for the day on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 11¢ to finish at $5.99/MMbtu.

In London, the February IPE contract for North Sea Brent crude was up 32¢ to $77.64/bbl. Gas oil for January increased $1.75 to $629.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.36 to $76.19/bbl on Dec. 29. The OPEC Secretariat in Vienna will be closed Dec. 31 and Jan. 1 for the New Year holiday.

Contact Sam Fletcher at samf@ogjonline.com.

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