MARKET WATCH: Oil prices climb, gas price falls with inventory reports

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 31 -- Oil prices continued to climb Dec. 30, with crude up for the fifth consecutive session on the New York Mercantile Exchange, but despite predictions of extended cold weather, natural gas prices dropped in both the futures and spot markets.

“Oil prices were up slightly after a just-above-consensus inventories draw of 3.8 million bbl,” said analysts in the Houston office of Raymond James & Associates Inc. “Despite oil's uptick, both energy stocks and the broader market traded relatively flat. Natural gas fell 2% but [was] trading up this morning in anticipation of another weekly withdrawal.”

The Energy Information Administration subsequently reported the withdrawal of 124 bcf of gas from US underground storage in the week ended Dec. 25. That left working gas in storage at 3.276 tcf, up 379 bcf from the comparable period a year ago and 391 bcf above the 5-year average. Gas prices declined Dec. 31 when the draw proved to be lower than expected.

Analysts at Energy Solutions Inc., Verona, Wis., said, “There’s a lot of questions about storage withdrawals at this time. In the first 2 weeks of December, storage withdrawal estimates were about 20 bcf below the actual withdrawal, and this prompted concerns that storage inventories may deplete at a faster pace than expected. This concern pushed natural gas prices higher. However, the opposite has occurred over the past 2 weeks.”

With the latest withdrawal below the expected 140-160 bcf, “many of the 2010 natural gas NYMEX monthly prices fell by 15¢/MMbtu or more immediately following the release of the EIA storage report,” said Energy Solutions analysts. “However, any price impact from the lower-than-anticipated storage report is likely to be offset again over the next week or so as colder winter temperatures continue to blanket the eastern half of the nation. The front-month natural gas NYMEX price could very well test the $6/MMbtu level again and even make a run at $6.50/MMbtu, but longer term, there should be more than sufficient natural gas in storage to meet demand.”

They said, “While these types of price run-ups can frighten end-use buyers, they serve another purpose . . . beneficial to buyers. Price rallies, like these today, are allowing producers to hedge some additional sales volumes for 2010, and that is a very good thing because it will help to keep production at higher levels, which in the end keeps prices lower.”

EIA earlier said 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 [OGJ Online, Dec. 30, 2009). Analysts said stocks of crude and petroleum products are at their lowest since March.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The close of [trading on Jan. 31] will be the start of a long weekend [with New York and London markets closed Jan. 1], and we doubt there will be many traders on their desks in the late hours of the day. It is also the expiry of the products and despite the cold weather the resistance of $2.1289/gal in heating oil (2009 high) is still holding.”

A survey by Bloomberg News showed the Organization of Petroleum Exporting Countries increased crude production in December to 28.965 million b/d, the highest level in a year as members cashed in on rising prices. That’s up 65,000 b/d from OPEC’s November production. The 11 OPEC members other than Iraq produced 26.615 million b/d, well above their official quota target of 24.845 million b/d.

However, Jakob said, “[US] crude oil imports from OPEC remain on the low side and are about 1 million b/d lower than a year ago with imports from Saudi Arabia now half the level of imports from Canada.”

Ethanol demand
Analysts at FBR Capital Markets & Co. in Arlington, Va., said, “Ethanol demand minimum could be 14% below expectations for at least part of 2010. The Environmental Protection Agency has sent its rule for implementing phase 2 of the renewable fuel standard (RFS2) to the Office of Management and Budget for review, which means that the rule will not be finalized when the year begins . . . This most likely means that the 2009 RFS of 11.1 billion gal will remain in place until the rules implementing the 12.95 billion gal 2010 standard are finalized.”

Whenever the rule is finalized, EPA could try to implement the higher standard retroactive to New Year’s Day. “However, the refiners are likely to advocate against this move and could pursue litigation to prevent retroactive implementation. This lingering uncertainty creates some risk for both refiners and ethanol producers,” FBR Capital Markets analysts said.

“Barriers to raising ethanol minimum remain,” they said. “The EPA is working to resolve contentious questions over calculating indirect greenhouse gas emissions, first time sub-requirements for cellulosic ethanol and biodiesel, and the 10% ‘blend wall.’”

If everything goes smoothly, they said, “OMB's review process can be completed in January and the rules finalized within 3 months. However, we note that there are a number of politically charged issues to be resolved and further delay remains a possibility.”

In other news, the Labor Department said Dec. 31 new claims for unemployment benefits fell 22,000 to a seasonally adjusted 432,000 filings last week, the lowest level since July 2008. Analysts were expecting an increase to 460,000. However, the weekly data may be low due to the Christmas holiday and snow storms, officials said. The 4-week average for new unemployment claims fell to 460,250, the lowest since September 2008 and down from a peak of 674,000 last spring.

Energy prices
The February contract for benchmark US light, sweet crudes gained 41¢ to $79.28/bbl Dec. 30 on NYMEX. The February contract advanced 44¢ to $80.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 41¢ to $79.28/bbl. Heating oil for January delivery inched up 0.65¢ to $2.11/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3¢ to $2.04/bbl.

The new front-month February natural gas contract dropped 13.1¢ to $5.71/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 15.5¢ to $5.83/MMbtu.

In London, the February IPE contract for North Sea Brent crude was up 39¢ to $78.03/bbl. Gas oil for January gained $6.75 to $636.25/tonne.

The Organization of Petroleum Exporting Countries' office in Vienna closed Dec. 31-Jan. 1 for the New Year holiday, so no price reports for OPEC crude were available.

Contact Sam Fletcher at samf@ogjonline.com

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