MARKET WATCH: Energy prices waffle in unconfident markets

Energy prices continued to waffle in mixed trading Jan. 4, but crude finished the short business week up 3%, while natural gas was down 5% overall.

“Like precious metals, crude oil appeared to benefit from the optimism and eventual resolution to the fiscal cliff. Beneath the surface, the crude oil market does not appear particularly confident,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

“This week marks the beginning of the fourth quarter earnings season, meaning that investor focus will once again shift from the macro to the micro,” said analysts in the Houston office of Raymond James & Associates Inc. “For what it's worth, more than 70% of companies in the Standard & Poor’s 500 Index have issued fourth quarter guidance below consensus earnings estimates. This morning, natural gas futures are in the green, while crude and broader market futures are trading in the red.”

Equity markets started 2013 on “a sugar high” last week after Congress “kicked the can” of US economic problems into February when it will try to resolve the national debt ceiling that effectively dropped into place at the end of last year, Raymond James analysts said. After largely underperforming the broader market in 2012, energy stocks improved last week with the SIG Oil Exploration & Production Index up 8% and the Oil Service Index up 7%.

Equity stocks opened lower on Wall Street Jan. 7 with the S&P 500 down from its 5-year high on Jan. 4.

Raymond James analysts said, “Our fundamental view on the oil market remains decidedly bearish. We project almost 2 million b/d of global oversupply in 2013, which means prices have to fall low enough to sharply curtail US drilling activity and also convince Saudi Arabia to cut production. We are keeping our 2013 West Texas Intermediate price forecast at $65/bbl but are bumping up the Brent forecast from $80/bbl to $85/bbl, reflecting a wider spread. Both prices are approximately 30% below consensus.”

They noted, “Geopolitical concerns and overall economic optimism can, of course, prop up prices temporarily—as has been the case lately—but if inventories become as full as we think, a major oil correction becomes unavoidable. With regard to US natural gas, we are reducing our 2013 forecast from $3.75/Mcf to $3.25/Mcf (which is 10% below consensus) as yet another warmer-than-normal winter has put a damper on demand.”

Because of their bearish outlook for commodity prices, Raymond James analysts said, “The overall proportion of energy stocks on which we have a positive rating is the lowest it's been in the past decade.”

Meanwhile, Walter de Wet with Standard Bank Group reported, “The Brent front-month contract is still finding resistance whenever it climbs above $112.50/bbl. We believe that in the coming days this resistance will remain while the market continues to digest the implications of the Federal Reserve’s Federal Open Market Committee minutes last week.” Those minutes “seriously dented” market confidence in continued monetary easing by the Fed, triggering immediate price drops for both WTI and North Sea Brent that eventually were recovered (OGJ Online, Jan. 4, 2013).

“If the Fed ceases to expand its balance sheet, it is also likely to cap upside for many other commodities,” said De Wet. However, unlike gold and “to a lesser extent” silver, he said, “Liquidity is not the main driving force behind industrial commodity prices, although it still plays an important role.”

De Wet said, “As far as the speculative activity in crude oil is concerned, the latest Commodity Futures Trading Commission data indicate that crude oil appeared to have benefited from the optimism and eventual resolution to the fiscal cliff. However, given the strong gains of the previous 2 weeks (15.8 million bbl and 12.8 million bbl), the most recent week’s gain was relatively muted (2.1 million bbl).” He said, “Underlying the overall improvement was a 10.9 million bbl unwinding of shorts, although this was all but negated by a disconcerting 8.8 million bbl decrease in speculative longs.”

Energy prices

The February and March contracts for benchmark US light, sweet crudes regained 17¢ each to $93.09/bbl and $93.51/bbl, respectively, Jan. 4 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., also was up 17¢ to close at $93.09/bbl in step with the front-month crude futures contract.

Heating oil for February delivery continued to slip, down 0.74¢ to $3.02/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 3.34¢ to $2.76/gal.

The February natural gas contract reclaimed 8.9¢ to $3.29/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., took back 5.2¢ to $3.24/MMbtu.

In London, the February IPE contract for North Sea Brent dropped 83¢ to $111.31/bbl. Gas oil for January lost $7.25 to $928.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.53 to $108.15/bbl. Over the first few days of January 2013, OPEC’s basket price has averaged $108.93/bbl, compared with an average $109.45/bbl for all of 2012.

Contact Sam Fletcher at samf@ogjonline.com.

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