MARKET WATCHWarmer weather outlook undermines energy prices

Dec. 11, 2006
The January crude futures price dropped Dec. 8 in the New York market, wiping out gains from the previous session, on forecasts of mild weather for the coming week.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 11 -- The January crude futures price dropped Dec. 8 in the New York market, wiping out gains from the previous session, on forecasts of mild weather for the coming week.

"A warm start to the winter with forecasts calling for continued warmer-than-normal temperatures through this week were widely blamed for the concurrent pullback in both crude oil and natural gas prices," said Robert S. Morris, Banc of America Securities LLC, New York.

Ministers of the Organization of Petroleum Exporting Countries are to meet Dec. 14 in Nigeria where they are expected to announce another cut in crude production, this time a reduction of 500,000 b/d.

"Officials from Venezuela, Iran, and Saudi Arabia all have stated recently that the group should cut production because crude inventory still remains too high," said analysts in the Houston office of Raymond James & Associates Inc. "Also, other members of OPEC said they support a production cut due to the recent steep decline in the US dollar that has negatively impacted OPEC's dollar-based revenues. It seems obvious that the cartel is determined to continue its quest of defending $60/bbl as the price floor for crude."

However, Morris said: "We believe the market has already priced in an additional 500,000 b/d cut while any decision to cut much more than this could provide a boost to oil prices. Interestingly, Saudi Arabia did state last week that $60/bbl is an acceptable level for benchmark crude oil prices although it believes Organization for Economic Cooperation and Development commercial inventories at 55 days of demand coverage are 2 days, or 100 million bbl, too high and that this could lead to a sharp drop in oil prices during the second quarter of next year."

At their last meeting in October, OPEC members agreed to cut production by 1.2 million b/d to 26.3 million b/d, effective Nov. 1. "In reality a further cut of 500,000 b/d would matter little as long as the previous one is not implemented," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. Traders generally agree that OPEC has made only a portion of the previously proposed cut, but there is still uncertainty as to how much it actually curtailed.

Energy prices
The January contract for benchmark US light, sweet crudes dropped 46¢ to $62.03/bbl Dec. 8 on the New York Mercantile Exchange. The February contract was down by 29¢ to $63.09/bbl. Heating oil for January delivery retreated by 2.15¢ to $1.76/gal on NYMEX. Unleaded gasoline for the same month slipped by 0.62¢ to $1.62/gal.

The January natural gas contract lost 11¢ to $7.56/MMbtu on NYMEX. "The warmer-than-normal start to the winter has had an even greater impact on natural gas prices," said Morris. "Meanwhile, most private meteorologists as well as the National Weather Service are forecasting warmer-than-normal temperatures this week and perhaps beyond, which could keep domestic natural gas storage levels above 3 tcf exiting the year."

In London, the January IPE contract for North Sea Brent crude declined by 37¢ to $62.20/bbl. The December gas oil contract gained $9.25 to $566.50/tonne, however.

The average price for OPEC's basket of 11 benchmark crudes dipped by 3¢ to $58.63/bbl on Dec. 8. So far this year, OPEC's basket price has averaged $61.29/bbl, up from $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected].