MARKET WATCH: Gas prices climb as crude falls to pre-Christmas levels

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 5 -- The price of crude oil fell 2.4% to pre-Christmas levels below $90/bbl Jan. 4 in the New York market, but natural gas futures hit a new 5-month high for the second time in as many days in anticipation of a larger-than-average decline in US gas storage due to cold weather.

“Oil suffered from a heavy sell-off after it hit a new 27-month high on [Jan. 3],” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “It is likely the sell-off was driven by profit-taking as the rally during the holiday week was not based on any underlying changes to the fundamental picture.”

He said, “Cracks and margins are generally stronger, with products tending to fare better than crude. Term structures all weakened significantly, however, with the sell-off being more pronounced at the front end of the curve.”

Standard Bank analysts question the sustainability of oil price above $90/bbl and expect to see some price weakness in January. “We also expect to see a narrowing of both the spread between Brent and West Texas Intermediate and the large gap between refining margins in Europe and those in the US,” Zhang said.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Despite a better-than-expected report for US factory orders, the Standard & Poor’s 500 Index fell marginally as comments from the US Federal Reserve's December meeting reflected concerns for economic growth amid the lackluster employment picture.” They said, “Taking the cue from crude, energy stocks underperformed the broader market.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Given the extreme correlation between WTI and the S&P 500, the global risk is to see the liquidation in WTI starting to negatively impact the equity markets. The US Federal Reserve support of the S&P 500 is at risk to weaker oil prices, this when the International Energy Agency is making headlines by calling the higher oil prices a threat to the world economy.”

Meanwhile, Jakob said, “Large speculators have been driving the oil rally in the last quarter of 2010; they are holding record-high net long positions and have managed to mark their end-of-the-year profit and loss at the highest price of the year. During the rally from $70/bbl to $90/bbl swap dealers went from being the main long [investors] in the market to being slightly short.”

He noted, “As we have been pointing out for some time, the moment large speculators (which by nature are short-term traders, not buy-and-hold investors like pension funds) decide to take some profit on their record long WTI positions, the correction will be severe. The ‘shooting star formation’ [of the Jan. 3 price escalation] was a reversal warning that was confirmed by [the Jan. 4 sell-off]. If more large speculators decide to take profit on their record WTI long positions rather than roll them in a $1/bbl contango loss, then the risk according to normal profit-taking pattern will be to see a slide that could take WTI to the $80-82/bbl range.”

Zhang said, “We remain cautious given that we ended 2010 with a historically high inventory level and as we move into the normal seasonal inventory building period, between January and May.”

US inventories
The Energy Information Administration said Jan. 5 commercial US crude inventories fell 4.2 million bbl to 335.3 million bbl in the week ended Dec. 31. That was more than twice the Wall Street consensus for a 2 million bbl drop; yet crude stocks remain above average for this time of year. Gasoline inventories increased by 3.3 million bbl to 218.1 million bbl, exceeding Wall Street’s expectations for a 500,000 bbl build. Finished gasoline stocks decreased while blending components increased. Distillate fuel inventories gained 1.1 million bbl to 162.1 million bbl, also above average. Analysts were expecting only a 700,000 bbl increase.

The American Petroleum Institute earlier reported a 7.5 million bbl drop to 337.1 million bbl in crude stocks during that same period. It said gasoline inventories jumped by 5.6 million bbl to 222 million bbl, and distillate fuel stocks gained 2.2 million bbl to 164.9 million bbl.

Imports of crude into the US fell 367,000 b/d to 8.4 million b/d last week, EIA reported. In the 4 weeks ended Dec. 31, crude imports averaged 8.4 million b/d, up by 458,000 b/d from the comparable period in 2010. Total gasoline imports last week averaged 513,000 b/d, with distillate fuel imports averaging 156,000 b/d.

The input of crude into US refineries increased by 59,000 b/d to 15 million b/d in the final week of December, with units operating at 88% of capacity, EIA said. Gasoline production decreased to 8.9 million b/d and distillate fuel production declined 4.6 million b/d.

Energy prices
The February contract for benchmark US light, sweet crudes closed at $89.38/bbl Jan. 4 on the New York Mercantile Exchange, down $2.17 for the day after trading at $88.36-92.07/bbl during that session. The March contract dropped $2.01 to $90.42/bbl.

On the US spot market, WTI at Cushing, Okla., was down $2.17 to $89.28/bbl. Heating oil for February delivery lost 4.63¢ to $2.51/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month continued its decline, down 1.33¢ to $2.41/gal.

The February contract for natural gas increased 1.9¢ to $4.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., rallied by 7.8¢ to $4.59/MMbtu.

In London, the February IPE contract for North Sea Brent declined $1.31 to $93.53/bbl, “which widened the front-month WTI-Brent spread to a massive $4.15/bbl, a level last seen during September,” Zhang said. Gas oil for January dropped $25 to $767.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.48 to $91.27/bbl. The OPEC secretariat will be closed Jan. 6-7 with no price updates.

Contact Sam Fletcher at samf@ogjonline.com.

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