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MARKET WATCH: Oil, gas prices fall on European ratings warnings

Prices fell in energy and most other markets Dec. 12, with crude down 1.7% and natural gas losing 1.9% in the New York futures market as ratings agencies warned European leaders may not have done enough to resolve the economic crisis during last week’s summit and may yet have their credit ratings reduced.

Even gold dropped nearly 3% on the warnings and a strengthening dollar. Meanwhile, the International Energy Agency reduced its world crude demand forecasts by 200,000 b/d to 89 million b/d for 2011 and to 90.3 million b/d in 2012.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil suffered a sell-off yesterday as the market became increasingly skeptical towards the latest European Union agreement. The yields for Italian and some of the peripheral Euro-zone government bonds rose sharply again.” He said, “Gasoline followed crude lower, while middle-distillates held up. The term structures for Brent and West Texas Intermediate were little changed, while the gas oil structure rebounded.”

OPEC

Analysts in the Houston office of Raymond James & Associates Inc. reported the crude supply from the Organization of Petroleum Exporting Countries is at the highest level in more than 3 years ahead of its Dec. 14 meeting. They said, “Despite economic headwinds, we continue to see the market tightening, with the deficit in Organization for Economic Cooperation and Development stocks continuing to widen against their 5-year averages.

Paul Horsnell, managing director of Commodities Research at Barclays Capital in London, said, “We expect the overall stance of most [OPEC] ministers to remain highly cautious [in the upcoming meeting], especially with price aspirations having increased by some $25/bbl since last year, in our view. Thus, any concern regarding the downside to prices, stemming from a difficult economic outlook, is likely to become a greater focal point vis-à-vis the upside.”

Other areas of concern are likely at the OPEC meeting, Horsnell said. “Oil market balances have softened since the previous meeting, due to a combination of slower demand growth and, more importantly, the partial return of Libyan volumes. To accommodate Libyan output at prewar levels of 1.6 million b/d, some adjustments to current production allocation between member states will have to be made,” he said.

Moreover, he said, “Relations between OPEC’s two heavyweights, Saudi Arabia and Iran, have taken a severe turn for the worse, especially following the dramatic announcement of an Iranian-backed plan to assassinate the Saudi ambassador in Washington. With growing concerns about Iran’s nuclear capabilities, western sanctions, and potential tail risk outcomes, Saudi Arabia will be wary of the possibility of overshooting oil prices and, hence, cognizant of maintaining a sufficient spare capacity buffer.”

The average price of OPEC’s basket of 12 benchmark crudes dipped 12¢ to $107.33/bbl on Dec. 12.

Energy prices

The January contract for benchmark US sweet, light crudes dropped $1.64 to $97.77/bbl on the New York Mercantile Exchange. The February contract fell $1.61 to $97.99/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.64 to $97.77/bbl.

Heating oil for January delivery declined 1.64¢ to $2.90/gal on NYMEX. Reformulated stock for oxygenate blending for the same month lost 3.25¢ to $2.56/gal.

The January natural gas contract was down 6.3¢ to $3.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18.1¢ to $3.13/MMbtu.

In London, the January IPE contract for North Sea Brent retreated $1.36 to $107.26/bbl. Gas oil for was unchanged at $932/tonne.

Contact Sam Fletcher at samf@ogjonline.com.


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