Sam Fletcher
Senior Writer
HOUSTON, Jan. 25 -- Futures prices for crude and products continued to climb Jan. 24 as the return of colder weather focused traders' attention on supply and demand factors that are still supporting energy markets.
"The central reasons for oil prices to rally are that global balances have tightened, that the Organization of Petroleum Exporting Countries' production is already below the annual average call on OPEC crude and is still being cut back further, that the macroeconomic environment has become much more supportive with the extreme bear view losing traction, that non-OPEC supply has continued to disappoint, that non-OPEC forecasts are continuing to be revised downwards, and that the international geopolitical environment is continuing its steady degradation," said Paul Horsnell at Barclays Capital Inc., London.
"In other words, there are some very strong reasons for prices to have rallied, and indeed some strong reasons why the move down may have got somewhat overblown. All the above still support prices and may now help to preserve some momentum, but the actual triggers for the move up have been a bit simpler, with two factors most evident in moving sentiment in recent days, namely the weather and the US State of the Union address," Horsnell said.
It was primarily warm weather that pushed down crude prices in the first 2 weeks of the year. Now that cold conditions have now appeared, "more-normal market dynamics have resumed," Horsnell said.
"The decision to double the size of the US Strategic Petroleum Reserve is not in itself overly dramatic. Declaring the addition of a flow of 100,000 b/d over a 20-year period is not a huge force at the margin of the market relative, for instance, to the potential ranges in the dynamics of the Chinese economy," he said. "What is more significant about the announcement is that the response to it implies that sentiment has switched in a way that facilitates the opening of new longs. In that sense, while the SPR announcement might have lit the blue touch-paper, the real force behind the rise was the accumulation of other more significant, but so far relatively underplayed supportive factors."
Horsnell and other industry analysts are skeptical about US President George W. Bush's proposal for strong reductions in US gasoline demand. "We remain unconvinced as to even the desirability on an energy-in, energy-out basis, or in terms of carbon accounting, of increasing US corn-based ethanol output," he said.
Meanwhile, the latest US weekly inventory data "show further strength in gasoline demand, while inventories rise further on high refinery gasoline yields," Horsnell said. The US Energy Information Administration said commercial US crude inventories (excluding SPR) increased for the second time in 10 weeks, up by 700,000 bbl to 322.2 million bbl during the week ended Jan. 19, following a 6.8 million bbl jump the prior week. Gasoline stocks rose by 4 million bbl to 220.8 million bbl last week (OGJ Online, Jan. 24, 2007). Although expected to fall, distillate fuels gained 700,000 bbl to 142.6 million bbl, with a decrease in heating oil offset by an increase in diesel fuel.
The inventory increase reported by EIA "was used as a buying opportunity and this now for the second week in a row." said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "Last week it led to an immediate $1.80/bbl sell off that stalled on the $50/bbl [crude price floor] and was followed by a Friday recovery. Yesterday it led to an immediate $1.15/bbl sell off which was fully recovered by the end of the day. Overall the momentum is positive, and dips are being bought."
Energy prices
The March contract for benchmark US sweet, light crudes traded at $53.66-55.45/bbl Jan. 24 on the New York Mercantile Exchange before closing at $55.37/bbl, up 33¢ for the day. The April contract increased by 25¢ to $56.16/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 83¢ to $54.73/bbl. The February contract for reformulated blend stock for oxygenate blending (RBOB) climbed by 1.43¢ to $1.46/gal on NYMEX. Heating oil for the same month increased 0.76¢ to $1.58/gal.
The February natural gas contract traded at $7.30-7.71/MMbtu on NYMEX before closing at $7.42/MMbtu, down 17.6¢ for the day. On the US spot market, gas at Henry Hub, La., gained 10¢ to $7.48/MMbtu.
EIA reported Jan. 25 the withdrawal of 179 bcf of natural gas from US underground storage in the week ended Jan. 19. That was above the consensus of Wall Street analysts and compared with withdrawals of 89 bcf the previous week and 81 bcf in the same period a year ago. US gas storage now stands at 2.8 tcf, up by 251 bcf from last year and 472 bcf above the 5-year average.
Temperatures last week were 28% colder than last year, 0.5% colder than the 10-year average, and nearly 35% colder than the prior week, said Robert S. Morris, Banc of America Securities LLC, New York. For Nov. 1-Jan. 18, which accounts for 52% of customer-weighted gas home heating degree days in an average winter, temperatures have been almost 13% warmer than the 10-year average.
In London, the March IPE contract for North Sea Brent crude gained 33¢ to $55.43/bbl. Gas oil for February gained $5 to $490/tonne.
The average price for OPEC's basket of 11 benchmark crudes escalated by $1.32 to $50.84/bbl on Jan. 24.
Contact Sam Fletcher at [email protected].
