MARKET WATCH: Oil, gas explore new highs in first trades of 2011

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 4 -- Energy prices continued to rise Jan. 3 in the first trading session of the new year with natural gas climbing 5.6% to a 5-month high in the New York market on predictions of colder-than-normal weather that should increase fuel demand through the first half of this month.

Both front-month West Texas Intermediate and North Sea Brent exceeded their 2010 highs in Jan. 3 trading. Reformulated blend stock for oxygenate blending (RBOB) cracks weakened slightly, while heating oil cracks strengthened amid cold weather forecasts. “In the meantime, the term structures of both WTI and [IntercontinentalExchange Inc.] ICE gas oil weakened,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Chief Long Range Forecaster Joe Bastardi at AccuWeather.com reported this could be the coldest January for the US as a whole since 1985.

“The broader [equities] market caught fire on the first trading day of 2011, gaining 1.2% on macroeconomic optimism and some positive manufacturing data,” said analysts in the Houston office of Raymond James & Associates Inc. “Hydrocarbons joined the rally as well as gas rose 5% on colder weather forecasts and oil reached a 27-month high (up 0.4%) on building speculation that the economic recovery is gaining momentum.”

Energy corporate stocks were mixed, however. “The Oil Service Index didn't participate in the rally and dropped 0.2% from weakness in names with offshore exposure,” Raymond James analysts reported. They blamed a report Marathon Oil Co. is terminating its $515,000/day 4-year contract for Noble Corp.’s Jim Day semisubmersible rig in the Gulf of Mexico. Marathon claims the rig wasn't ready for operation by yearend, a charge that Noble denies. The de facto moratorium on deepwater drilling in the gulf as the government implements new rules and restrictions is undoubtedly a factor. “The rig is now idle, and we expect much lower rate as the company tries to secure work (could be $400,000/day), with at least 3 months of downtime,” the analysts said.

With oil and gas prices up in early trading Jan. 4, Raymond James analysts speculated, “It seems as if yesterday may set the pace for the new year as oil, gas, and the broader market are all trading higher.” But that “likely” is just “wishful thinking,” they said.

2010 strong for oil
Zhang said, “Oil had a strong year in 2010. Front-month West Texas Intermediate started at $81.51/bbl and finished the year at $91.38/bbl, a 12.1% gain. For most of the year, oil traded between $70-90/bbl, reaching a low of $68.01/bbl on May 20 and a high of $91.51/bbl on Dec. 23. The average price of the front-month WTI for 2010 was $79.61/bbl, some $17.52/bbl higher than that of 2009 and equivalent to an increase of 28.2%.”

The latest Commodity Futures Trading Commission report on Dec. 28 showed “money kept on piling into oil, as money managers’ net long position shot up by 6% week-over-week or 13,073 contracts to a new all-time high,” said Zhang. “Meanwhile, producers certainly appear to believe current prices are good value, too, with the commercial hedgers’ net short position gaining by 7.3% week-over-week or 17,089 contracts. However, the current commercial hedgers’ net short position of 250,887 is still well short of the record in 2010 of 314,007. On products, both RBOB and heating oil saw a decrease in net speculative length of 2.7% and 3.6%, respectively.”

Energy prices
The February contract for benchmark US light, sweet crudes increased 17¢ to $91.55/bbl Jan. 3 on the New York Mercantile Exchange. The March contract was up 21¢ to $92.43/bbl.

On the US spot market, WTI at Cushing, Okla., was priced at $91.55/bbl, the same as the front-month futures contract. The new front-month February contract for heating oil advanced 1.04¢ to $2.55/gal on NYMEX. However, RBOB for the same month declined 0.3¢ to $2.43/gal.

The February natural gas contract shot up 24.5¢ to $4.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., closed at $4.51/MMbtu, up 28.5¢ from its last reported finish on Dec. 30.

In London, the February IPE contract for North Sea Brent crude gained 9¢ to $94.84/bbl, still at a strong premium over WTI. Gas oil for January soared by $30.25 to $792.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 80¢ to $89.79/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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