MARKET WATCH: Crude ends 3-day losing streak

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 26 -- The price of crude rose Jan. 25, regaining a quarter of what it lost in a 3-day downturn last week, but the front-month natural gas contract dropped with forecasts of warmer weather.

“Crude oil gained 1% yesterday as the market waved goodbye to concerns about [Ben] Bernanke's confirmation [as chairman of the Federal Reserve], [President Barack] Obama's bank reforms, and Chinese demand growth,” said analysts in the Houston office of Raymond James & Associates Inc. “Gas futures fell 1.7% after new reports forecast warmer than anticipated weather in early February after a brief cold dip later this week. Energy stocks leveraged oil's correction and outran slightly positive broader markets.”

Raymond James analysts advised, “Look for today's market to react to a slew of economic reports, including home price data and consumer confidence, as well as a meeting by the Fed's Open Market Committee.” They said the Dow Jones Industrial Average and Standard & Poor’s 500 Index are down slightly before the opening of the New York market on Jan. 26 following lower trading in major Asian and European markets, while crude and natural gas were down 1% and 2%, respectively.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “There was little new news for crude oil yesterday and if West Texas Intermediate managed technically to move back above $75/bbl there was not enough substance behind the move to prevent overnight pressure on the news that China is imposing higher reserve ratio on certain banks in its continued efforts to curb overheating. The US existing home sales numbers were as well on the negative side and today we will need to watch for the US consumer confidence number in front of the Fed meeting’s result tomorrow.”

Jakob reported, “Oil stock levels and excess capacity both upstream and downstream are still much above the levels of previous years, yet oil is being priced at the equivalent of the boom years when no available spare capacity was available to the system. The fundamental link to current prices is weak, hence oil prices need at least some general optimism that boom times are around the corner to sustain prices above $80/bbl in a contango market. That general optimism depends a lot on China’s consumption saving the rest of the world, and that will be somewhat challenged by the Chinese government trying to regulate the formation of bubbles.”

The gasoline crack is still well supported, with US production of products somewhat capped by refinery maintenance, operational glitches, “and some risk premium for additional demand from Brazil (due to the very tight sugar and ethanol supply and demand) and Venezuela (due to the power supply risk on the refining system),” Jakob said.

Meanwhile, analysts at the Centre for Global Energy Studies, London, reported global oil demand “has finally turned the corner,” with oil use in the fourth quarter of 2009 up from the same quarter in 2008 after five consecutive quarters of year-on-year declines. “December’s surge in oil use was enough to ensure that global oil demand in the fourth quarter 2009 was above that of fourth quarter 2008, the first year-on-year increase in quarterly oil demand since the second quarter of 2008. It also led to the first quarterly stock draw since the winter of 2007-08, but the impact may prove to be short-lived,” said CGES analysts. “Despite rising demand, market fundamentals are not expected to support upward pressure on oil prices in 2010.”

One factor contributing to lower oil prices last week was news the UK’s inflation rate jumped to 2.9% in December. “Few envisaged a rise of this magnitude and the figure certainly makes an interest rate rise before the middle of the year more likely, evidenced by the fact that the pound strengthened considerably against the euro after the news was announced,” said CGES analysts. “More crucially for the oil market, other countries might follow suit. If the US Federal Reserve were to raise interest rates then not only would the ensuing stronger dollar help weaken the oil price…but the incipient recovery in the US economy to date could be undermined.”

Energy prices
The March contract for benchmark US sweet, light crudes increased 72¢ to $75.26/bbl Jan. 25 on the New York Mercantile Exchange. The April contract gained 77¢ to $75.69/bbl. On the US spot market, WTI at Cushing, Okla., was up 72¢ to $75.26/bbl. Heating oil for February delivery increased 2.42¢ to $1.97/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 3.51¢ to $2/gal.

The February natural gas contract dropped 9.7¢ to $5.72/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., increased 8.5¢ to $5.76/MMbtu.

In London, the March IPE contract for North Sea Brent crude was up 86¢ to $73.69/bbl. Gas oil for February dropped $3.25 to $594.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes fell $1.05 to $71.97/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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