MARKET WATCH: Natural gas price escalates with colder forecasts

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 7 -- Natural gas escalated 3.5% Dec. 6 to “levels it hasn't seen for 4 months” in the New York market on forecasts for colder weather in the eastern US. Crude prices continued to climb, albeit at reduced rates, in both US and London markets.

“Oil consolidated yesterday following its recent strong rally as the dollar strengthened,” reported James Zhang at Standard New York Securities Inc., the Standard Bank Group. However, front-month reformulated blend stock for oxygenate blending (RBOB) and heating oil lost by almost 0.5%. “The backwardation in crude persists except the first 3 months where the physical market is holding the structure in contango,” he said.

“Continued euro-debt fears stalled the broader markets after a recent rally as energy stocks on the SIG Oil Exploration & Production Index (EPX) and the Oil Service Index (OSX) rose a modest 0.8% and 0.1%, respectively,” said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Global markets were at a standstill yesterday, with low volume on the New York Stock Exchange and a small $2 billion [purchase of US treasuries] (today $7 billion, tomorrow $1.5 billion), and the US stock market will have to trade between the overnight positive input of the US president giving in to the extension of the tax cuts and speculation in Chinese newspapers of an interest rate hike over the weekend (the Shanghai Composite Index was nonetheless up 0.7 % overnight).”

The weekend risk of China raising its interest rates will be added to the risk of the Dec. 11 meeting of the Organization of Petroleum Exporting Countries ministers in Ecuador. “Saudi Arabia has for now provided no hints that it might look at a supply increase, but we are heading into the weekend at the top of the new [Saudi oil minister Ali I. Al-Naimi’s acceptable price] range,” Jakob said. He noted demand has improved over the last 18 months, offshore stocks have been depleted, emerging Asia cannot pass any more the fuel increases to consumers, and OPEC has a low ratio of compliance to the official quotas. “On a price and fundamental basis, Al-Naimi would have a justification for an official increase of the quota, but that is something difficult to bet on given the history of OPEC pushing for the last buck,” he said.

Jakob said, “We are at the start of 2011 at the same price level as the start of 2008, and at the December 2007 OPEC meeting Al-Naimi gambled to let prices go, which then led to the great recession. He had however at the time much lower [excess production] capacity available after having brought a surprise increase of supply in September 2007. At $90/bbl, OPEC would be paid for its crude only $8/bbl less than the average of 2008. Of course, it gambled for more in the first half of 2008 but paid the price in the second half. Iran meanwhile is receiving on a euro/bbl basis the best price since April 2008.”

Raymond James analysts advised, “Look for [equity] stocks to get a boost following the 2-year extension of Bush-era tax cuts in a compromise reached between President Barack Obama and Congressional Republicans.”

Analysts at FBR Capital Markets & Co., Arlington, Va., said, “Although the renewable energy tax extenders do not appear to be part of the [tax agreement] announced last night, we note that Senate Democrats who are supportive of extension will still dictate the pace in the Senate.” They said, “We believe it is possible that Democrats, forced to swallow the bitter pill of [lower tax] extensions for upper-income taxpayers, will be able to tack on extenders for renewable energy projects without sparking objections from Republicans, who will be eager to extend the tax credits and go home for the year.”

FBR Capital analysts observed, “Efforts to extend renewable energy credits have failed several times this year over opposition to offsetting tax increases. However, we also note that, given the high cost of the tax-extension bill, the renewable credits would seem to be a relatively small addition.”

If clean-energy tax extensions are not included in the deal to extend former President George W. Bush’s soon-to-expire tax cuts, they said, “There remains a chance for extenders legislation to pass as a stand-alone before Congress adjourns for the year. However, we note the extremely tight timeframe and concerns about deficits and ‘pay-fors’ as major barriers after Congress reaches agreement on one major lame-duck tax bill.”

Energy prices
The January contract for benchmark US sweet, light crudes climbed 19¢ to $89.38/bbl Dec. 6 on the New York Mercantile Exchange. The February contract gained 15¢ to $89.74/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 19¢ to $89.38/bbl. Heating oil for January delivery dropped 1.17¢ to $2.48/gal on NYMEX. RBOB for the same month continued its decline, down 1.04¢ to $2.34/gal.

The January natural gas contract increased its rise by 13.9¢ to $4.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 16¢ to $4.43/MMbtu.

In London, the January IPE contract for North Sea Brent crude inched up 3¢ to $91.45/bbl. Gas oil for December gained $4.25 to $766/tonne.

The average price for OPEC’s basket of 12 reference crudes was up $1 to $88.13/bbl. The group’s Vienna office will be closed Dec. 8.

Contact Sam Fletcher at samf@ogjonline.com.

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