MARKET WATCH: Crude oil hits 2-year high as energy prices continue climbing

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 3 -- Energy prices continued to rally Dec. 2 with the front-month crude contract up 1.4% to a 2-year high in the New York market on upbeat housing and sales data. Despite a smaller-than-expected draw from US storage, the near-month natural gas contract gained 1.7% with forecasts of colder temperatures.

The increase in energy prices was supported by big gains in the Dow Industrial Average (up 1%) and in Standard & Poor’s 500 index (up 1.3%) following the European Central Bank’s decision to continue financial stimulation of the European market until April. “Energy stocks leap-frogged the broader markets,” said analysts in the Houston office of Raymond James & Associates Inc.

“The basic underlying support to prices came from the record 10.4% increase in pending home sales, which topped all economists’ estimates in a Bloomberg survey,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Retail sales too were better than expectations, registering 5.3% increase in November vs. an estimated 3.5% growth. With continued growth in the manufacturing sector, strong retail sales, and now solid housing figures, we believe that the economy is finally turning a corner.” Commodities market “will be the big beneficiaries” of this economic momentum, he predicted.

ECB Pres. Jean-Claude Trichet “did not deliver” the equivalent of the US Federal Reserve Bank's second round of quantitative easing; weekly jobless claims were higher than expected; “but markets were supposedly saved by pending home sales that were rebounding from a bottom,” said Olivier Jakob at Petromatrix, Zug, Switzerland. The macro-data so far this week has been mixed, he said, “but on the first day of the month a leading US investment bank revised up its forecast for the US economy. It has also gone bullish on US banks, and that sector was leading the S&P higher yesterday.”

Oil and gas prices were down in early trading Dec. 3 on reports of a surprise jump in the US unemployment rate to a 7-month high of 9.8% in November. The jobless rate has exceeded 9% for 19 consecutive months, the longest period recorded. A total of 15.1 million people were unemployed in November. The US Department of Labor said employers reported the net addition of only 39,000 jobs last month, down from expectations of 150,000 new jobs and creation of 172,000 jobs in October.

Meanwhile, on Dec. 2 both West Texas Intermediate and North Sea Brent crudes broke out of the previous trading range for the year to date. “Brent’s first and second month future contracts moved into backwardation, albeit only 4¢/bbl on yesterday’s settlement, for the first time since April 2008,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“In contrast to the positive economic data from the US, WTI futures contracts are clearly less favored by investors than Brent. The aggregated trading volume of WTI (in New York) stayed flat yesterday vs. [the previous] day and 2% below the average aggregated daily trading volume in November. By comparison, the aggregated trading volume of ICE Brent shot up by 19% yesterday…and 36% above the average aggregated daily trading volume in November,” Zhang said.

Jakob also noted “a small backwardation” in Brent but warned, “This has been an ongoing test during the second half of 2010 as the floating stocks were depleted. Given that the main area of demand growth is in Asia we find that this year the spreads on Oman have been the leading indicator. They had moved back to backwardation on strong buying from China and were leading the move of Brent towards backwardation. The challenge for Brent will now to maintain the backwardation while maintaining a wide premium to the other regional benchmarks.”

Meanwhile, Deutsche Bank AG raised its 2011 oil price forecast to $87.50/bbl from $80/bbl. “We believe the trading range for Brent crude has moved from $65-85/bbl to $70-90/bbl,” said Adam Sieminski, DB chief energy economist, Washington, DC. “We are moving our 2011 forecast to top end of that range. We are also lowering our 1H 2011 gas price forecast, but expect better conditions by fourth-quarter 2011.”

Sieminski said, “In our view, the only way to fix low gas prices is to have a period of even lower gas prices. We have accordingly cut our gas price forecast for the first half of 2011 to $4.25/MMbtu from $4.70/MMbtu previously. Our oil price forecast for 2011 is now 5% above consensus and our gas price forecast is about 10% below consensus.” He added, “We believe the flattening in the crude oil forward suggests oil price rallies are becoming based on more solid foundations.”

However, Jakob cautioned, “While the improvement in demand is real, it is also real that the Organization of Petroleum Exporting Countries has gradually increased production and is supplying currently 700,000 b/d more crude oil than in the first half of 2009 (and 700,000 b/d more NGLs).” He said, “Given the spare capacity still available we continue to expect increased leakage from OPEC members above $85/bbl and especially so with a dollar that is quite stronger than in 2008.”

Energy prices
The January contract for benchmark US light, sweet crudes climbed $1.25 to $88/bbl Dec. 2 on the New York Mercantile Exchange. The February contract gained $1.17 to $88.42/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.25 to $88/bbl.

Heating oil for January delivery increased 4.9¢ to $2.45/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 5.49¢ to $2.36/gal. “Across the product complex, gasoline has been leading the rally,” Zhang reported. “In contrast, gasoil cracks weakened to a level below that of September and October, despite the arctic weather now in Europe. Both are rather counterseasonal. We believe the crude oil market is walking on thin ice by relying on support from gasoline cracks.”

The January natural gas contract was up 7.4¢ to $4.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.9¢ to $4.23/MMbtu.

In London, the January IPE contract for Brent crude rose $1.82 to $90.69/bbl. Gas oil for December gained $15.75 to $750.50/tonne.

The average price for OPEC’ basket of 12 reference crudes shot up $2.01 to $86.14/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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