Sam Fletcher
Senior Writer
HOUSTON, Jan. 22 -- Speculation that the US may fall into a recession pushed crude prices to a 6-week low in premarket trading Jan. 22 after floor trading on the New York Mercantile Exchange was closed Jan. 21 for the US holiday honoring Martin Luther King Jr.
"Last week US stocks posted the steepest weekly drop since July 2002 after a trio of soft data points—lower-than-expected home construction, retail sales, and manufacturing—reinforced speculation that the economy is entering a recession," said analysts in the Houston office of Raymond James & Associates Inc. "Unfortunately," they said, "the market does not appear to be turning around this morning."
Olivier Jakob of Petromatrix GMBH, Zug, Switzerland, said, "The global financial system is under a 'stress test' where money management, preservation of capital, and margin calls should have a greater role than any underlying fundamentals."
In the current market, Jakob said, an $85/bbl price for West Texas Intermediate "is a must-hold number not only because of the nice support lines it makes on a graph, but more importantly because large layers of 'put options' have been written downwards" from that price.
If the $85/bbl price support were to break, Jakob said, "Then we run the risk of seeing more hedging from the writers of the 'puts' (selling of futures). Technically, the momentum stays negative and remains capped by the 5-day moving average for the eighth consecutive day. The dollar index has also risen during the meltdown, and the weather patterns are not making for a great support."
Natural gas outlook
Meanwhile, Raymond James analysts said: "In the short run, the US has very limited, if any, ability to switch from crude to natural gas as a fuel source. This is one of several factors that have helped provide us with confidence that oil and US gas prices will not average the typical 7:1 btu parity in 2008 or even in 2009. In the long run (beyond 2010), oil and gas should eventually return to parity on a global basis. There will be many forces that will ultimately lead us back to parity. The most important and timely driver will be the build-out of a global LNG and natural gas infrastructure [that] will include regasification terminals, gas pipelines, gas storage, and gas-fired consumers in regions other than the US. For example, we just cannot imagine China being willing to pay two or three times as much (per btu) for energy than the US. The global gas build-out will happen. It is just a matter of how long it will take to accomplish."
Raymond James analysts said, "In addition to natural gas and LNG becoming a more fungible global commodity, the next decade will likely see (1) an increase in natural gas-fired electricity generation, (2) a decrease in the use of oil as a heating fuel, and (3) the ability to use natural gas as an automotive fuel source. The bottom line for investors is that we do not believe that oil and US gas prices will be linked to the typical 7:1 btu price parity ratio over the next few years.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 72¢ to $85.34/bbl on Jan. 21.
Contact Sam Fletcher at [email protected].
