MARKET WATCH: Energy prices slumped slightly; OPEC takes no action

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 13 -- Energy prices weakened slightly Dec. 10 on speculation China might increase its benchmark interest rate over the weekend as oil ministers of the Organization of Petroleum Exporting Countries met Dec. 11 in Quito, Ecuador.

As was generally expected, OPEC ministers made no official production changes during their brief session. At the Centre for Global Energy Studies (CGES), London, analysts reported, “Ministers expressed their general satisfaction with the current level of oil prices, even though the OPEC basket of crudes was trading well above the $70-80/bbl range that was described as ‘a good price’ for oil by Saudi Arabia’s minister. OPEC Sec. Gen. Abdalla al-Badri insisted current prices are not hurting the world economy and reflected the weakness of the US dollar, although historical [data] do not support this assertion.”

In fact, Al-Badri suggested OPEC’s own members are hurting most because they sell their oil priced in US dollars and buy in euros. Since the beginning of 2007, a $90/bbl oil price would, on average, have translated to €65/bbl, about €1/bbl below the Dec. 10 price. However, CGES analysts said, “Over the past 4 years, $90/bbl oil has rarely been worth more to producers in euro terms than it is now. The US dollar may have weakened against the euro since June, but it is still some 2.5% above its 5-year average value against the European currency.”

With nothing new out of OPEC, analysts in the Houston office of Raymond James & Associates Inc. said, “China stole headlines again last week as a triad of positive data points supported rising oil prices: 1) Chinese refineries ran at record levels last month after greatly boosting crude imports; 2) China's manufacturing grew at a faster pace for a 4th straight month in November; and 3) the country refrained from raising interest rates even as inflation accelerated to the highest levels in 2 years.”

They added, “Demand forecasts worldwide have increased, sending oil futures into backwardation for the first time since Lehman Bros. Holdings Inc. went bankrupt in 2008. Despite the bullish outlook for crude, oil stocks traded relatively flat [on Dec. 10], while the broader market grew 0.6%.” Oil and gas prices were up in early trading Dec. 13, with the National Weather Service calling for a high probability of below-average temperatures in eastern third of the US Dec. 18-22.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Our fundamental position on crude remains unchanged: demand is slowly improving, but we believe inventory levels are too high for rallies above $90/bbl to be sustainable yet. Our caution on crude oil grows.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said “Crude came under pressure as the monetary tightening by China is expected to rein in some of the growth. However, prices are likely to find support from the International Energy Agency’s increased projection for the crude consumption next year. The IEA increased its forecast of global oil demand by 260,000 bbl to 88.8 million bbl in 2011 on projections of stronger demand in North America and non-Organization for Economic Cooperation and Development [countries in] Asia. Chinese crude imports surged by 1.1 million b/d in November. And China alone is expected to account for over 35% of demand growth in 2010.”

In the gas market, Sharma said, “Weather continues to be the main arbiter for the price direction.” However, he said, “We are now seeing more support for our argument, which we have been making over the last several months, that supply would largely be flat year-over-year (merely 200 MMcfd increase) due to capital’s gas-to-oil shift; with the latest support coming from the EIA, which is now projecting a slight year-over-year decline (0.1%) in average marketed production next year. Although the storage level might exit the withdrawal season at a record high around 1.85 tcf at the March-end due to the Marcellus production surge in the first quarter and winter premium driven completion activity, we believe potential supply declines after the first quarter of 2011 and increasing demand will tighten the market around summer next year.”

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “In the US, the big move and focus of the week was on the weakness of the long dated treasuries, where yields were rising in a very aggressive way and back to levels not seen since June. This has then turned the mortgage rates to increase relatively strongly as well.

He noted the US Federal Reserve Bank has scheduled its next tranche of permanent open market operations (POMO) to inject into the economy $105 billion between Dec. 13 and Jan. 11. Moreover, Jakob said, “Rep. Ron ‘End the Fed’ Paul (R-Tex.) has been confirmed as the chairman of the subcommittee that oversees the Fed. That will make for a nice show starting Jan. 1. Cash held by US commercial bank decreased by $30 billion, therefore not starting a trend with the increase of $80 billion seen in the previous week.”

Energy prices
The January contract for benchmark US light, sweet crudes fell 58¢ to $87.79/bbl Dec. 10 on the New York Mercantile Exchange. The February contract dropped 57¢ to $88.31/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 58¢ to $87.79/bbl. Heating oil for January delivery dipped 0.93¢ to $2.46/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 3.12¢ to $2.31/gal.

The January natural gas contract continued falling, down 1.8¢ to $4.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 16.3¢ to $4.36/MMbtu.

In London, the January IPE contract for North Sea Brent crude lost 51¢ to $90.48/bbl. Gas oil for December was unchanged at $757.75/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 26¢ to $87.65/bbl. So far this year the OPEC basket price has averaged $76.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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