Oil price strengthened in 2010

Sam Fletcher
OGJ Senior Writer

Front-month crude prices waffled in late December, dropping below $90/bbl Dec. 30 before rebounding to $91.38/bbl Dec. 31 in the last trading session of 2010 in New York. On Dec. 23, the last trading day before Christmas, the February contract for US crudes escalated to $91.51/bbl on the New York Mercantile Exchange, its first time to top $90/bbl since October 2008.

“Crude ended 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 last 2 weeks of the year, and the National Weather Service forecast below-average temperatures for the center of the country on Jan. 8-12. Low temperatures and heavy snowfall also hit Europe in the closing days of 2010.

Olivier Jakob at Petromatrix, Zug, Switzerland, said Jan. 3, “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.”

As investors turned from the stock market to the bond market, the US Federal Reserve bought $240 billion of Treasuries from primary dealers, sometimes the same day dealers received them.

2011 outlook
Raymond James analysts reported Jan. 3, “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.” Although usually overly conservative, Raymond James’ oil price forecast of an average $80/bbl for 2010 “came in just a hair above the full-year average of $77/bbl,” they said, with price moves range-bound at $70-85/bbl for most of the year as market fundamentals took a backseat to a cautious economic recovery and global currency concerns.

They expect the 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 2011 oil forecast is $90/bbl, rising to $100/bbl (or higher) in 2012,” they said.

Raymond James analysts reported, “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.”

So, they said, “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.”

(Online Jan. 3, 2011; author’s e-mail: samf@ogjonline.com)

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