MARKET WATCH: Energy futures prices rebound

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 1 -- Energy commodity prices rebounded Feb. 26—the final trading session of that month—with crude briefly topping $80/bbl in intraday trading in the New York market on a weaker dollar.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Cash held by US banks was slightly lower during the week, but the commercial and industrial loans continue to head south. New home sales at record low, continued decline in loans, unused cash continuing to pile up…we have seen stronger economic indicators than this and in this environment we continue to not believe that oil will trade at $95/bbl and the consumer not care.”

He reported, “The dollar index was relatively stable during the week, and the correlation between crude oil and the dollar that was dominant in 2009 stands totally broken in 2010. On the 2009 correlation, West Texas Intermediate should be at $63/bbl. This week should be volatile for the dollar index as we run up to the US non-farm payroll numbers on [Mar. 5].”

Jakob said, “The April WTI 3-2-1 refinery margin lost about 50¢/bbl during the week, and with the support of the gasoline crack, the processing economics are now close to the levels of a year ago. Over the last 2 weeks the Department of Energy data is showing an increase of refinery runs in the US, back to levels that are at par to last year.”

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. said, “Over the weekend, Chile, the fourth-largest oil consumer in Latin America, was forced to shut down its two largest diesel refineries after an 8.8-magnitude earthquake shook the country.” Turning to natural gas, they observed, “The front-month contract is down 1% despite a bullish short-term weather outlook. The National Weather Service is calling for unseasonably cold temperatures to blanket the Lower 48 states during the Mar. 8-14 period.”

In New Orleans, analysts at Pritchard Capital Partners LLC noted the Energy Information Administration reported natural gas production of 62.82 bcfd from the Lower 48, down 500 MMcfd month-on-month despite weather-related well freeze-offs that affected production. Wyoming and New Mexico declined by 200 MMcfd each while Texas reported a 100 MMcfd production decline. Louisiana reported only 0.9% month-on-month production growth, lowest since the beginning of last year. “Since peaking in February 2009, the US Lower 48 production was down only by approximately 760 MMcfd or nearly 1.2% by yearend 2009. As we anticipated, the EIA data further indicated that natural gas supplies are holding firm. We believe that the EIA-reported supplies figures would continue to show resilience as more E&P firms probably brought drilled but uncompleted well inventory online to time the pricing support over winter,” said Pritchard Capital Partners.

US oil production
Unlike most producers outside the Organization of Petroleum Exporting Countries, the US “put up remarkably strong oil production growth of 7.1% in 2009” following “a nearly nonstop decline in its oil production for the past 3 decades,” said Raymond James analysts in a separate report.

A production increase of some 320,000 b/d—“60% of the net growth or 41% of the gross, predecline growth”—came from “one-time items” such as post-hurricane recovery in the Gulf of Mexico and the first full year of production from Thunder Horse, the world's largest deepwater development. “The rest of the growth (which should be more sustainable) came from more structural and organic drivers, including strong growth in deepwater, the Bakken, and rising onshore natural gas liquids volumes. Since only the second category represents growth that can be sustained for more than a few years, we see low single digit annualized growth in oil production as the most that the US can realistically achieve over the next 3 years,” Raymond James analysts said.

US oil production may continue to grow on “a steady-state” basis for a few years. “But even under a very optimistic scenario it won't be anything close to the 7.1% growth rate of 2009. Low single digit annualized growth is the most we can envision for the next 3-5 years. Our ‘best guess’ scenario is that production will grow around 200,000 b/d for the next 2 years and then flatten after that,” said Raymond James analysts. “While this may not seem all that impressive, remember that the norm over the 1980-2008 period has been 3% annualized declines, so even stable production represents significant improvement from the past few decades.”

Raymond James currently projects 3.4% growth in 2010-12, followed by 1%/year declines thereafter. “While the US most likely won't go back to its steep historical declines anytime soon, it's unrealistic to expect future growth to be anything close to 2009 levels. As a result, the US shouldn't be a major factor (either positive or negative) for future changes in non-OPEC production, which means non-OPEC is still set to decline over time,” the analysts said.

Energy prices
The April contract for benchmark US light, sweet crudes temporarily traded as high as $8.05/bbl Feb. 26 before closing at $79.66/bbl, up $1.49 for the day on the New York Mercantile Exchange. The May contract gained $1.48 to $80.01/bbl. On the US spot market, WTI at Cushing, Okla., escalated by $2.06 to $79.60/bbl, closing in sync with the lead-month futures contract. Heating oil for March delivery increased 3.87¢ to $2.02/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 4.18¢ to $2.09/gal.

The April natural gas contract regained 4.6¢ to $4.81/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1.5¢ to $4.80/MMbtu.

In London, the April IPE contract for North Sea Brent crude increased $1.30 to $77.59/bbl. Gas oil for March gained $16 to $628.75/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 6¢ to $74.60/bbl. So far this year, OPEC’s basket price has averaged $74.50/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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