MARKET WATCH: Natural gas fell 4.6% to a low for this year

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 8 -- The front-month natural gas price fell 4.6% to a year-to-date low Feb. 7 in the New York market on forecasts for mild weather. Oil prices slipped more than 1%, with North Sea Brent crude dropping below $100/bbl.

“Natural gas prices have fallen nearly 15% over the past 2 weeks and are within earshot of dropping beneath $4/Mcf,” said analysts in the Houston office of Raymond James & Associates Inc. They said oil and gas prices were still falling in early trading Feb. 8 and likely would continue.

Meanwhile, the Dow Jones Industrial Average and the Standard & Poor’s 500 index both hit new 2½-year highs “with merger and acquisition activity on the forefront of investors' minds,” they said. Energy corporate stock prices also climbed. It “sure looks right now” as though the market performance in January has “already poised the markets” for a successful year, Raymond James analysts said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil traded sideways initially yesterday, largely tracking the US dollar. However, the market ended much lower as it appeared to have triggered technical selling when it broke the 13-day moving average.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “As expected, the combination of the lower geopolitical perceived risk in Egypt and the start of the Goldman roll [the monthly rolling forward underlying futures contracts in the excess return index portfolio via the Goldman Sachs Commodity Index] in a wide West Texas Intermediate contango were fatal for the flat price of WTI yesterday.”

He said, “Given the wide contango in WTI, the Brent premium to WTI increased further and is testing again a premium of $12/bbl. This momentum trade on Brent vs. WTI began at the start of the year. However, the Brent time structure has started to shift in recent days from a flat structure to a contango structure.”

If the high level of crude inventories in Cushing, Okla., “fully justifies” a wide contango in WTI, Jakob said, “An extraordinary premium of Brent to WTI starts to be harder to justify when European cash differentials are on the weak side, when there are no confirmed supply disruptions (Egypt), and when Brent is returning close to a carry contango. It is the first time since April 2010 that Brent has been in a trend of a widening contango, and the front Brent contango is at levels not seen since June of last year. The return of Brent to a contango structure should not be ignored, as it is starting to level off the risk between having length in WTI and in Brent.”

He acknowledged, “WTI still has a much wider contango than Brent, but Brent carries the risk of an extraordinary premium to WTI and a volatility in the Brent-WTI spread that is outside of historical parameters.”

Meanwhile, Zhang noted, “Term structures for both WTI and Brent weakened, with the sell-off focused towards the front-end of the curves.” As the Egyptian situation eases, its “increasingly likely” WTI in the short term will “more likely win the tug of war with Brent” and drag Brent’s price lower, he predicted.

When geopolitical tensions in North Africa and the Middle East dominated the oil market last week, Zhang said, “The US government quietly announced a sale of 2 million bbl of heating oil from its strategic reserves, citing sulfur specification changes coming into effect next year. The timing of the announcement is interesting.”

Standard Bank Group analysts said last week member countries of the Organization for Economic Cooperation and Development should put their strategic petroleum reserves on standby in case supply disruptions trigger oil price spikes that could cripple the economic recovery. “Nevertheless, using the SPR to intervene in the oil market is always a very political decision and not one to be taken lightly,” Zhang said.

Energy prices
The March contract for benchmark US sweet, light crudes fell $1.55 to $87.48/bbl Feb. 7 on the New York Mercantile Exchange. The April contract dropped $1.21 to $90.64/bbl. On the US spot market, WTI at Cushing was down $1.55 to $87.48/bbl. Heating oil for March delivery declined 1.06¢ to $2.71/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, increased 1.52¢ to $2.45/gal.

The March natural gas contract dropped 20.6¢ to $4.10/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18.5¢ to $4.32/MMbtu.

In London, the March IPE contract for North Sea Brent crude traded at $98.77-100.90/bbl during the session before closing at $99.25/bbl, down 58¢ for the day. Gas oil for February increased $1.75 to $845/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes retreated 83¢ to $96.02/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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