Sam Fletcher
OGJ Senior Writer
HOUSTON, Jan. 3 -- The front-month crude contract dropped below $90/bbl Dec. 30 in the New York market before rebounding the next day above $91/bbl in the last trading session of 2010.
“Crude ended the year on a strong note as prices surged forward 1.7% to end the year up 15%,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas gained 1.5% as forecasts showed unusually cold winter weather spreading throughout the country.” Snowstorms disrupted holiday travel in the eastern US over the holiday week. The National Weather Service's forecast for Jan. 8-12 is for below-average temperatures to descend upon the center of the country.
On the other hand, they reported the broader equity market was essentially unchanged in light trading Dec. 31. “Energy stocks posted slight outperformance vs. the Standard & Poor’s 500 index as stocks rode the strength of commodity prices,” said Raymond James analysts. “Separately, the Organization of Petroleum Exporting Countries’ December output gained 0.5% to climb to a 4-month high as rising oil prices supported production.”
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “US equities were about unchanged in the holiday week. The S&P 500 was up 0.07% in the week and a strong 6.53% for the month for a total gain of 12.78% for the year. The NASDAQ was up 6.19% during December and closed the year 16.91% higher.”
The second phase of the US Federal Reserve Bank's quantitative easing program (QE2) “is managing a strong defense on the S&P 500, not allowing any setbacks.” As a result the historical volatility on the S&P 500 fell last week “to the lowest level since 1971,” Jakob said.
He noted, “As retail investors have been pulling their funds out of the stock market and moved more into the bond market, the US Federal Reserve has bought $240 billion of Treasuries from the primary dealers, at times buying Treasuries that primary dealers received on the same day they sold it to the Fed. The problem with markets dependent on subsidies is the difficulty to predict what will happen to the markets once the subsidies end. QE2 is scheduled to run until the end of the second quarter, but by the end of the first quarter the focus should already be on what will be the next steps taken by [Fed Chairman Ben] Bernanke to support the financial markets. The commodity markets will also be dependent on the US Federal Reserve, and Bernanke’s action signals should prevail over any fundamentals for the flat price of commodities in the first half of 2011. The US Federal Reserve will buy about $28 billion of Treasuries from primary dealers this week, starting with $7-9 billion today.”
In addition, Jakob said, “Volume on the New York Stock Exchange has been extremely low in 2010 and with financial institutions about to launch more trading platforms to cross-trade internally outside of the exchange, we expect the trend of low volume on the public exchange to continue as more volume is diverted to the outside pools. This will leave the public exchange more exposed to pricing distortions in periods of stress. The flash crash of May 2010 was a first warning. The lack of volume on the public exchange also makes it easier to implement a support program for the main index, and as a result 2010 has confirmed an extreme correlation between the price of oil, the pricing of the energy sector and the broad S&P 500 Index.”
He said, “During the holiday break the dollar was under strong pressure, with the yen and the Swiss franc being particularly strong. The Swiss franc is at a record high to the dollar and the yen is now also trending up to that status again. The strength of the Swiss franc remains a time-bomb for Hungary with most of its home mortgages issued in Swiss francs. Hungary has nationalized the assets of the private pension funds to reduce the budget deficit, but it is still at risk of further downgrade in ratings while it takes over the presidency of the European Union for the next 6 months.”
2011 outlook
Raymond James analysts noted, “For years now, we have been bearish on US natural gas prices and bullish on global oil prices. That was the right call, and we believe it will remain so in 2011. For the second year in a row, our oil forecast was unusually accurate (historically we have been overly conservative). Our 2010 oil forecast of $80/bbl came in just a hair above the full-year average of $77/bbl. Not that pinning 2010's price was all that difficult, as price movements were range-bound ($70-85/bbl) for most of the year as fundamentals played a secondary role. Instead, a cautious global macroeconomic recovery and global currency concerns drove investor sentiment and prices.”
They expect these same trends to continue in 2011. “Oil prices should move steadily higher assuming gradual economic improvement, with support coming from the combination of rising global oil demand and stagnant global oil supplies. Thus, our (admittedly conservative) 2011 oil forecast is $90/bbl, rising to $100/bbl (or higher) in 2012,” according to Raymond James.
Furthermore, they said, “Our bearish US natural gas bet in 2010 was not bearish enough. At the start of 2010, our $5/Mcf forecast was 15% below consensus, but still a full dollar above the 2009 price of $4/Mcf. Directionally, our bearish outlook proved correct, but we were not bearish enough since prices in 2010 actually averaged $4.40/Mcf.”
Therefore, Raymond James reported, “Our 2011 outlook is more bearish than either of the past 2 years. This is a result of continued gas supply growth due to improved production profiles and a stubbornly high gas rig count. We are going to need huge (and likely unattainable) increases in gas demand from the industrial and power generation industries in order to rebalance the gas market in 2011. As a result, we are once again slicing into our natural gas price forecasts and now expect 2011 to average $3.75/Mcf and 2012 to average $4.25/Mcf (with bias to the downside on both of these estimates). Finally, with a 2011 outlook for healthy oil prices, stagnant or depressed US gas prices, and rising rig counts, we believe that energy stocks are generally poised for additional gains in 2011. Overall, we are looking for energy indices to be up 5-20%, driven mainly by decent earnings growth.”
Energy prices
The February contract for benchmark US light, sweet crudes rebounded $1.54 to $91.38/bbl Dec. 31 on the New York Mercantile Exchange. The March contract gained $1.53 to $92.22/bbl. The expiring January heating oil contract increased 5.83¢ to $2.54/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month was up 6.14¢ to $2.45/gal. The February natural gas contract escalated by 6.7¢ to $4.41/MMbtu.
In London, the February IPE contract for North Sea Brent crude climbed by $1.66 to $94.75/bbl at a now long-standing premium to West Texas Intermediate crude. Gas oil for January lost $3.25 to $762.50/tonne.
The average price for OPEC’s basket of 12 reference crudes increased 48¢ to $89.47/bbl. Its basket price averaged $77.45/bbl in 2010, up from a 2009 average of $61.06/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
