MARKET WATCH: Winter cold continues gas price rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 24 -- Natural gas continued a 5-week rally Jan. 21 in the New York market on one of the coldest days of the year in the Midwest and forecasts for below-average temperatures while crude decline on more speculation China will tighten its monetary policy to cool its fast rising economy.

Energy stocks ended the day mixed as the broader market rose slightly, said analysts in the Houston office of Raymond James & Associates Inc.

Natural gas prices gained 5.7% last week “to the highest level since Aug. 4, as [US] inventories declined by 243 bcf [in the week ended Jan. 14], the most this winter season thus far and 10 bcf above market expectations,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “With the arrival of another cold wave, we expect the year-over-year surplus to get wiped out completely and turn into a deficit by the next week. Winter is now 53% complete and has been 7% colder than normal, creating almost 185 bcf of additional demand so far.”

Meanwhile, at the Centre for Global Energy Studies (CGES), London, analysts noted 6 months of “much stronger than expected demand growth” in the second half of 2010 has drawn crude inventories down. “Oil prices are rising in response to tighter market fundamentals and a perception that the Organization of Petroleum Exporting Countries will not use its spare capacity in a timely manner,” they said. “The OPEC basket price required by Saudi Arabia to balance its economy has risen from $74/bbl last year to $83/bbl in 2011.”

The average price for OPEC’s basket of 12 reference crudes dipped 5¢ to $92.90/bbl on Jan. 21. So far in the first month of 2011, OPEC’s weekly basket price has averaged $92.58/bbl, compared with an average price of $77.45/bbl for all of 2010. CGES analysts said, “OPEC is once again denying that rising prices reflect market fundamentals, as it did in early 2008, setting the scene for higher prices if it does not act.”

However, James Zhang at Standard New York Securities Inc., the Standard Bank Group, said Jan. 24, “It is reported earlier today that the Saudi Arabian oil minister signaled OPEC may increase supply to meet growing demand.” Zhang said, “We agree with OPEC’s assessment that the global oil market is currently well supplied. However, we do not agree with the conclusion that no action should be taken [by] OPEC as long as inventories are high. To support price stability…OPEC should reiterate its intention to increase production, even though there is no immediate need, rather than reiterate its justifications for inaction.”

WTI-Brent spread
The spread between front-month contracts of West Texas Intermediate and North Sea Brent crude finished Jan. 21 with the price of WTI down $8.49/bbl from Brent. “Product cracks generally strengthened, while the term structure for WTI and for gas oil [on the IntercontinentalExchange Inc. (ICE)] weakened slightly,” Zhang said. The front-month WTI contract was down by $2.43/bbl net during last week, “while front-month Brent weakened only $1.08/bbl, after it hit a new 28-month high on Jan. 14,” he said.

Olivier Jakob at Petromatrix, Zug, Switzerland, reiterated, “There is in our opinion nothing abnormal with WTI being at a discount to Brent (something that we have called to happen on a structural basis all of last year), but our opinion remains that the current Brent premium to WTI will have an impact on future physical flows that will work against the sustainability of the current futures premium.”

Jakob said, “We cannot associate the strength of Brent futures vs. WTI with Europe running out of crude oil, given that cash crude (including Forties) was offered at lower premiums to dated during the week; we also cannot associate it with enough weakness in WTI given that if there is a contango in WTI, there is not yet the super-contango that has given in the past a wide discount of WTI to Brent.”

Zhang said, “In the financial markets, it appeared that concerns over Chinese monetary policy were setting the tone last week, which sent the prices of many risky asset classes lower, including the oil price. However, the US continued to report generally better-than-expected macroeconomic data.”

Energy prices
The new front-month March contract for benchmark US light, sweet crudes dropped 48¢ to $89.11/bbl Jan. 21 on the New York Mercantile Exchange. The April contract lost 33¢ to $90.63/bbl. On the US spot market, WTI at Cushing, Okla., fell 75¢ to $88.11/bbl as that market tried to get back in pace with the new futures market price. Heating oil for February delivery increased 2.76¢ to $2.65¢/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 3.64¢ to $2.46/gal.

The February natural gas contract climbed 4.1¢ to $4.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 12¢ to $4.73/MMbtu.

In London, the March IPE contract for North Sea Brent crude rose $1.02 to $97.60/bbl. Gas oil for February increased $7.75 to $814/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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