MARKET WATCH: Energy prices slip lower in skeptical markets

Energy prices generally slipped lower Dec. 28 with little hope for a last-minute budget agreement despite the US House of Representatives being called for special session Dec. 30. Oil and gas prices continued to decline in early trading Dec. 31 despite reports of some shifts in the Congressional deadlock.

“The uncertainty led to the markets falling every trading session last week,” said analysts in the Houston office of Raymond James & Associates Inc. “Today, though, investors seem to be taking the question mark in stride: Broader market futures are trading in the green, while crude and natural gas are down only slightly.”

Nevertheless, they said, “While growing North American oil supply is a key part of our bearish intermediate-term stance on oil prices, a decidedly weak outlook for global oil demand should not be overlooked either.”

Industrialized countries accounted for 51% of total oil demand in recent years. But “for the first time ever,” demand in those countries is “on the cusp of falling below the 50% level over the next 12-18 months.” Raymond James analysts said, “In these countries, oil intensity is already at a point where an incremental dollar of gross domestic product has minimal relevance for demand. In emerging markets (the other 49% of demand), oil intensity is considerably higher, but it is declining as countries like China and India diversify from heavy industry to more of a service economy (and buy more Priuses). In fact, as we compare the most recent decade (2002-12) to the previous one (1992-2002), the decline in global oil intensity actually picked up pace rather than slowing down. We think a reasonable ‘rule of thumb’ assumption is that global oil demand over the next 3-5 years will grow, at most, at one quarter of global GDP.”

The International Monetary Fund of the UN, they noted, “estimates that global GDP grew 3.3% in 2012 and projects 3.6% for 2013. Our oil demand growth assumptions of 0.8% for 2012 and 0.5% for 2013 therefore equate to 0.24% and 0.14% of the GDP growth rate. While growth in global oil demand is not about to turn negative—barring a major recession—the days of 3% or even 1.5% demand growth are firmly in the rearview mirror.”

Energy prices

The February and March contracts for benchmark US light, sweet crudes declined 7¢ each to $90.80/bbl and $91.30/bbl, respectively, Dec. 28 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., also was down 7¢ to $90.80/bbl.

Heating oil for January delivery lost 2.75¢ to $3.04/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 2.14¢ to $2.80/bbl.

The new front-month February natural gas contract dropped 5.7¢ to $3.47/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., regained 7¢ to $3.40/MMbtu.

In London, the February IPE contract for North Sea Brent was down 18¢ to $110.62/bbl. Gas oil for January fell $4.50 to $933/tonne.

The Vienna offices of the Organization of Petroleum Exporting Countries is closed Dec. 31-Jan. 1, so no price updates for its basket of 12 benchmark crudes will be available.

Contact Sam Fletcher at samf@ogjonline.com.

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