Sam Fletcher
Senior Writer
HOUSTON, Jan. 4 -- The front-month crude futures contract hit a record $100.09/bbl in early afternoon trading Jan. 3 on the New York Mercantile Exchange before slipping lower amid concerns of possible economic weaknesses.
However, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said this was "the first real attempt to break the mythical level," since the previous Jan. 2 intraday record of $100/bbl "was only a controversial one-lot transaction done on the floor away from computer trading." He said, "The three-digit number provided strong resistance [on Jan. 3] but with a late buying wave maintaining the close within $1 of $100/bbl, we would expect to see further attempts at breaking it." Jakob said, "Technically the positive momentum is still valid and the risk remains for a strong advance when and if [a closing price of] $100/bbl is broken, as the next target will then jump to $105/bbl." He warned, "One eye should be kept constantly on the dollar index and its reaction to the US job data later today, and the other eye on the other commodities."
In the Houston offices of Raymond James & Associates Inc., analysts said the latest reports on US crude inventories sent "mixed signals that possibly contributed to a slight pullback in crudes. "Also, tanker rates have skyrocketed out of the Middle East, indicating stronger production (i.e. more cheating)," among members of the Organization of Petroleum Exporting Countries, they said.
The Energy Information Administration reported US crude stocks plunged 4 million bbl to 289.6 million bbl during the week ended Dec. 28, well below market expectations of a 1.7 million bbl drop. It marked the seventh consecutive week that US crude inventories have fallen (OGJ Online, Jan. 3, 2008).
However, Jakob said those statistics weren't all that surprising. "The draw in crude oil stocks was expected due to the end-of-year tax savings. The crude stock change during January will be a better fundamental barometer since the December draws are only bullish if not met by a rebuild during January. Middle Distillate stocks are low, but the weather in the US Northeast is turning to much above normal, and RBOB stocks are comfortable both on absolute and days of forward demand basis," he said.
The final US weekly data for 2007 show US crude inventories ending the year at just below 290 million bbl, some 65 million bbl lower than the peak at the end of June, said Paul Horsnell of Barclays Capital Inc., London. "The sharp down-trend in crude inventories has taken them from well above their 5-year average to 6.8 million bbl below that average. Allowing for crude oil held as pipeline fill, refinery and tank bottoms, (i.e., the minimum operating requirement), we estimate that the level of discretionary commercial US crude inventories has now fallen by about 60% over the past 6 months. What was a significant overhang is now a deficit relative to normal patterns, he said.
Robert S. Morris, Banc of America Securities LLC, New York, said, "After outperforming the broader markets in 2007 for the fifth time in the past 6 years, the key relative performance driver for the exploration and production sector continues to be the consensus outlook for commodity prices while, from a valuation perspective, the risk-reward [ratio] is now more balanced given our 'normalized' ($70/bbl [for crude] and $6.75/MMbtu [for gas]) commodity price outlook. However, apart from a sharp turn in the weather this winter, we believe that the 2008 consensus for natural gas prices has further to drop while, if the current NYMEX futures strip price is any indication, then, similar to 2007, the consensus for crude oil prices would rise much more sharply than the anticipated drop in the consensus outlook for natural gas prices."
Morris said, "Along the natural gas front, and apart from normalizing for weather, we still project that the domestic supply/demand balance will be no tighter this year than in 2007. However, we are keeping a particularly close eye on LNG imports, Canadian imports, and electric generation-driven gas demand. Thus, our projections also assume that natural gas prices remain effectively disconnected from oil prices in 2008."
Ethanol outlook
"The combination of $100/bbl crude oil and a larger national renewable fuel standard have pushed ethanol prices up considerably over the past several weeks," reported Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va. Although that is positive for ethanol, Bernstein cautioned investors not to get carried away. "US ethanol markets are currently well balanced, but new supplies will likely put downward pressure on prices over the coming months. Additionally, corn prices have staged their own rally over the past few weeks, reducing the implied benefit from higher ethanol prices," he said.
Meanwhile, US ethanol spot market prices have risen from $1.70/gal in September-October to $2.20/gal today. "This coincides with a similar crude oil price-driven increase in wholesale gasoline prices as well as the passage of the Energy Independence and Security Act of 2007, which put in place materially higher renewable fuel magnates," Bernstein said. "The latest Department of Energy data suggests that US ethanol consumption peaked at 7.6 billion gal/year in November, before declining to about 7.3 billion gal/year in December, which may be explained by the recent increase in ethanol prices. We expect US ethanol consumption will materially increase this year, but with demand growth outside the Midwest still relatively modest and an estimated 5 billion gal in new production capacity currently in late stage construction, ethanol prices should soon decline."
Bernstein said, "Another important consideration is that over this same time frame Chicago Board of Trade prompt-month corn prices have risen from $3.75/bushel to $4.50/bushel, increasing ethanol production costs by nearly 20¢/gal. Ethanol production margins, we estimate, are currently about 35¢/gal, above recent lows, but still below the 45¢/gal 2007 full year average."
Energy prices
The February contract for benchmark US light, sweet crudes closed at $99.18/bbl Jan. 3, down 44¢ for the day on NYMEX. The March contract lost 39¢ to $98.94/bbl for the same period. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 44¢ to $99.19/bbl. The February contract for reformulated blend stock for oxygenate blending (RBOB) dropped 2.75¢ to $2.54/gal. Heating oil for the same month retreated 2.13¢ to $2.72/gal.
The February natural gas contract fell 17.8¢ to $7.67/MMbtu on NYMEX. But on the US spot market, gas at Henry Hub, La., gained 10¢ to $7.88/MMbtu. EIA reported the withdrawal of 87 bcf from US underground storage in the week ended Dec. 28. That was below Wall Street's consensus and compared with withdrawals of 165 bcf the prior week and of 47 bcf during the same period last year. US gas storage now stands at 2.9 tcf, down 160 bcf from year-ago levels but 222 bcf above the 5-year average.
Raymond James analysts said, "A large amount of short-covering in the face of recent cold weather has likely been the driver for gas moving from under $7/Mcf to over $7.50/Mcf. Frankly, we would not be surprised if gas spikes to $8/Mcf over the coming weeks given the expected change in year-over-year storage differentials. There is no reason to jump ship now on energy stocks. Even gassy names may outperform in the coming 2 weeks."
In London, the February IPE contract for North Sea Brent crude lost 24¢ to $97.60/bbl. Gas oil for January gained $5.50 to $860.50/tonne.
The average price for OPEC's basket of 12 reference crudes increased $1.88 to $93.94/bbl on Jan. 3.
Contact Sam Fletcher at [email protected].
