MARKET WATCHCrude oil prices slip lower

Dec. 7, 2006
Energy prices slipped lower Dec. 6, despite a bullish report on draws from US petroleum inventories, with markets still uncertain over pending production cuts by the Organization of Petroleum Exporting Countries, which is scheduled to meet Dec. 14 in Nigeria.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 7 -- Energy prices slipped lower Dec. 6, despite a bullish report on draws from US petroleum inventories, with markets still uncertain over pending production cuts by the Organization of Petroleum Exporting Countries, which is scheduled to meet Dec. 14 in Nigeria.

"The continuing warm weather seems to be weighing on crude prices," said analysts in the Houston office of Raymond James & Associates Inc.

"[Crude] pricing momentum is starting to erode, and the last 3 trading days have closed below the 5-day moving average, and we are now at risk to see the 5-day moving average crossing below the 9-day moving average," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

OPEC outlook
Crude prices could increase as a result of a "risk premium" preceding the OPEC meeting, "as well as the increased risk that Nigerian rebels use the occasion to embarrass the hosting government," Jakob said. A second possible cut in OPEC production in as many months is already "starting to be priced-in," he said. Should OPEC members agree to a second output reduction, it would "need to be higher than 500,000 b/d to be a surprise," said Jakob.

Raymond James analysts previously reported preliminary data showed OPEC members have reduced production by only 550,000 b/d, less than half of the group's agreed cut of 1.2 million b/d effective Nov. 1.

Jakob said, "For now we can not see in the US import data any sign of an OPEC reduction. Given the contradiction that there is between the OPEC trackers, we are starting to believe that there was a push of additional barrels from OPEC in front of the last meeting announcement of cuts; so while there has been a reduction in November sailings it would have come after a higher October push."

Raymond James analysts said, "OPEC drumbeats for another production cut keep getting louder as the mid-December meeting of the cartel approaches. Meanwhile, Nigerian rebel attacks continue and do their bit in keeping the commodity markets on edge and factoring a 'fear' premium into crude prices. In the latest round, three Italian workers for Eni SPA were abducted. While the markets have been ambivalent about OPEC announcements, Nigerian civil strife has contributed in actually curtailing Nigerian production by about 700,000 b/d this year." Eni recently declared force majeure at the Okono-Okpoho offshore oil field due to attacks by local militants (OGJ Online, Nov. 27, 2006).

The US Energy Information Administration reported commercial US inventories of crude fell by 1.1 million bbl to 339.7 million bbl during the week ended Dec. 1. Gasoline stocks also dropped 1.1 million bbl, to 200 million bbl, during the same period. Distillate fuel inventories inched lower by 400,000 bbl to 132.4 million bbl (OGJ Online, Dec. 6, 2006). That was a smaller decline in distillate stocks than was expected, but distillates have dropped more than 19 million bbl in the last 9 weeks, analysts said.

Energy prices
The January contract for benchmark US sweet, light crudes lost 24¢ to $62.19/bbl Dec. 6 on the New York Mercantile Exchange. The February contract dropped 40¢ to $63.52/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 24¢ to $62.20/bbl. Unleaded gasoline for December delivery dipped by 1.52¢ to $1.62/gal on NYMEX. Heating oil for the same month slipped by 0.43¢ to $1.79/gal.

The January natural gas contract increased by 4.2¢ to $7.73/MMbtu, however. On the US spot market, gas at Henry Hub, La., gained 2.5¢ to $7.40/MMbtu. On Dec. 7, EIA reported the withdrawal of 11 bcf of natural gas from US underground storage during the week ended Dec. 1, 2006. That was less than the consensus of Wall Street analysts and down from withdrawals of 32 bcf the previous week and 62 bcf during the same period a year ago.

US gas storage now exceeds 3.4 tcf, up 232 bcf from year-ago levels and 282 bcf above the 5-year average.

In London, the January IPE contract for North Sea Brent crude dropped 25¢ to $63.07/bbl. The December gas oil contract was unchanged at $553.50/tonne

The average price for OPEC's basket of 11 benchmark crudes lost 9¢ to $59.10/bbl on Dec. 6.

Contact Sam Fletcher at [email protected].