MARKET WATCH: US oil markets closed for holiday

Oil markets were quiet Jan. 21 with the New York Mercantile Exchange and cash markets closed for the US holiday honoring Dr. Martin Luther King Jr.

In London, the March IPE contract for North Sea Brent lost 18¢ to $111.71/bbl, while the average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 40¢ to $109.32/bbl.

“Overnight, the market was awakened from its slumber by the announcement that Japan’s Central Bank would be engaging in more stimulus,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group, on Jan. 22. “Not only has this lent the market some encouragement from the perspective of increasing Japanese oil demand (the country is the world’s third-largest consumer of oil) but also the secondary consequences for the region should the stimulus measure translate into improved economic growth in Japan.” He also noted that “the potential positive effects for the Chinese and South Korean economies (the fourth and tenth largest global oil consumers respectively).”

However, Ground said, “The rally proved fleeting, with oil markets correcting in rather dramatic fashion this morning as the euro took a dive. Clearly, participants are still concerned that prices (especially for West Texas Intermediate) have run too hard in recently. We would concur and look for a correction, particularly in the US benchmark, to take place in the coming weeks.”

In other news, both industry and political analysts noticed the paragraph President Barack Obama devoted to climate change in his second inaugural address Jan. 20, with many assuming that issue will play a more prominent role in his second administration (OGJ Online, Jan. 21, 2013). He continued to dismiss those who disagree on causes and solutions of climate change, however, saying “some may still deny the overwhelming judgment of science.”

Obama said, “The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition…. That is how we will preserve our planet, commanded to our care by God.” Some analysts interpreted Obama’s reference to God in that context as an attempt to transcend partisanship on the issue and appeal to those who embrace religion over science.

However, Frank Maisano, a Washington, DC-based energy and political analyst, more realistically noted: “It will take a lot more than a throw-away mention in a speech to get a significant number of his squeamish Democratic colleagues and certainly a very antagonistic Republican House to go along.”

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. reported, “The risk-on trade continued” on Jan. 18 because of a brief debt ceiling extension scheduled for a vote in the House of Representatives this week. “Crude prices also climbed last week on positive Chinese and US economic data, along with a widened risk premium amid the Algerian hostage crisis. Natural gas benefited from colder weather forecasts,” they said.

Raymond James analysts said, “This time last year our US oil and gas production model told us that surging US gas supply was probably going to force natural gas prices lower though 2012. In hindsight, this surging gas supply coupled with a ‘non-winter’ helped send pre-winter natural gas prices from more than $4/Mcf to a low of $1.91/Mcf by mid-April. Now that the dry gas rig count has dropped precipitously (down 60% year-over-year), many energy analysts are eagerly anticipating an imminent rollover in US gas supply.”

However, they said gas producers apparently “didn't get the memo” because gas supply continues to climb steadily. “In fact, our updated gas production model now says that US gas supply is not likely to rollover anytime soon and could even continue growing through the rest of this decade (especially if oil prices stay anywhere near current prices).”

Raymond James analysts said this “surprising, non-consensus” US gas supply growth outlook is primarily driven by three main factors:

• Marcellus supply growth has been unprecedented and is even proving to be more impressive than the Haynesville growth from 2007-11.

• Mass infrastructure build out will facilitate the flow of more gas volumes over the next few years.

• Lofty crude prices continue to drive high levels of liquids drilling, producing large amounts of associated gas.

As a result, they are updating their 2013 and 2014 natural gas supply numbers and will examine the drivers supporting their 2013 gas supply growth forecast growth of 1.3 bcfd and their 2014 growth forecast of 600 MMcfd.

Contact Sam Fletcher at samf@ogjonline.com.

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