MARKET WATCH: Gas price jumps to 11-month high; oil price dips

Sam Fletcher
Senior Writer

HOUSTON, Dec. 18 -- The front-month natural gas contract jumped 5.6% to an 11-month high Dec. 17 on the New York market after the Energy Information Administration reported the withdrawal of 207 bcf of natural gas from US underground storage.

The withdrawal exceeded the Wall Street consensus as a result of cold weather over most of the US in the week ended Dec. 11.

That dropped the amount of working gas in storage to 3.566 tcf. However, that’s 381 bcf above year-ago levels and 433 bcf above the 5-year average (OGJ Online, Dec. 17, 2009).

“It was cold last week. . .20% colder than the 30-year average and 6% colder than last year,” said analysts in the Houston office of Raymond James & Associates Inc. “Despite the run-up in gas prices, energy stocks were unable to overcome the market's move into the red yesterday (with the Dow Jones Industrial Average down 1.3%) likely due to disappointing jobless claims data.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “With the cold weather, stocks of natural gas were drawn during the week at a greater than average pace, but, given the extremely high starting base, the absolute stock levels remain well above recent history.”

Crude again topped $73/bbl in intraday trading before closing down slightly, ending a 2-day rally, “following a retreat to the dollar stemming from concerns over Greece's ability to pay its debts,” Raymond James reported.

Jakob said, “Continued strength in the dollar index kept most of the commodity complex under pressure yesterday, and the evolution of the dollar will remain a strong market input as we . . . approach the end of the year and as the commodity indices are underperforming the equity indices.” He said, “The dollar-led pressure was present for most of the day on West Texas Intermediate but is not that apparent on the front month closing value as a sharp reduction in the contango has moved the front months relatively higher. The WTI time spreads have been volatile for the last week as we approach the [Dec. 21] expiry of the January contract.”

While position management prior to expiry can cause volatility on spreads, there was “likely some short covering” of short spread positions Dec. 17 as Suncor Energy Inc. assessed damage from a Dec. 15 fire at one of the company's two oil sands upgraders north of Fort McMurray, Alta. Preliminary reports indicated no structural damage to the facility, but company officials said production is expected to be reduced 120,000-150,000 b/d during 2-4 weeks of repairs. Suncor said the incident should not impact its 2009 production outlook of 290,000-305,000 b/d.

“Based on the current stock-building rate, the amount of lost production would not be enough to force stock draws but would be enough to leave the stock levels balanced, and this then considerably lowers the potential for the spreads to go into an abnormal contango. In short, the loss of Canadian supply should keep the contango closer to a normal full-carry than to a squeeze value,” said Jakob.

“While the Suncor fire is a new input that needs to force a reassessment of the WTI spread weakness expectation, we would not go overly bullish on it because at the same time the crack values are coming off—and especially so in gasoline,” he said. “The US refinery capacity utilization is low but not low enough to have sustained support on the products. Heating oil has been receiving some support from the colder weather, but data from the American Railroad Association is not yet showing any significant improvement in shipments, which are down 10% vs. the same week of 2008 or 18% vs. 2007.”

Environmental debates continue
Dec. 18 “is (supposedly) the final day of the Copenhagen climate conference, and, after 2 weeks of talks, the rough outline of a summit statement looks generic, toothless, and watered-down. Emissions-cut pledges, verification rules, and financing deals have yet to be finalized,” said Raymond James analysts. “Looks like the talks will stretch into the weekend—though a complete summit breakdown also cannot be ruled out. A key issue to watch: Will the final statement (if any) set a deadline for turning all this into a binding treaty (say Dec. 31, 2010), or will the timing be left open? Either way, there's a long way to go until a treaty emerges that the US Senate can then consider. And Senate approval is by no means assured—just look at Kyoto.”

The summit statement outline is available at (http://www.guardian.co.uk/environment/2009/dec/18/copenhagen-climate-change.

Raymond James analysts also noted continued political bickering over environmental issues in Washington, DC, where the Environmental Protection Agency's recent decision in principle to start regulating carbon has set off a flurry of debate over its framing of future regulations. “Environmentalists want rules to limit carbon even from small emitters, though the EPA has said it intends to only cover large enterprises. Business groups, meanwhile, are readying litigation to make sure the EPA doesn't act on carbon without a specific mandate from Congress,” the analysts reported.

In other action, the White House unveiled $5.4 billion in new tax credits to create manufacturing jobs in the renewable energy industry over the next 3 years that some are dismissing as “nothing but window dressing,” said Raymond James. Analysts reported, “The idea is to give the credits to producers of clean energy equipment rather than end-users (who already benefit from the investment tax credit and production tax credit), thereby spurring US research and development and manufacturing instead of simply driving imports from Asia. That said, it will take a lot more than $5 billion to eliminate China's cost advantage vs. the US (or Germany) in, say, PV module manufacturing.”

Energy prices
The January contract for benchmark US light, sweet crudes traded as high as $73.13/bbl intraday before closing at $72.65/bbl, down 1¢ Dec. 17 on the New York Mercantile Exchange. The February contract dropped 30¢ to $74.08/bbl. On the US spot market, WTI at Cushing, Okla., was down 1¢ to $72.65/bbl in lock-step with the front-month futures contract. Heating oil for January delivery slipped 0.84¢ to $1.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.19¢ to $1.85/gal.

The January contract for natural gas jumped $30.6¢ to $5.77/MMbtu on NYMEX. On the spot market, gas at Henry Hub, La., was unchanged at $5.56/MMbtu.

In London, the new front-month February IPE contract for North Sea Brent lost 92¢ to $73.37/bbl. Gas oil for January dropped $11.50 to $591.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down 40¢ to $71.77/bbl on Dec. 17.

Contact Sam Fletcher at samf@ogjonline.com.

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