Sam Fletcher
Senior Writer
HOUSTON, Feb. 3 -- A weak market and stronger US dollar pushed down prices for oil and products Feb. 2, but a better-than-expected increase in a manufacturing index for January boosted natural gas prices.
"Crude fell close to 4% on concerns about the global economy," said analysts in the Houston office of Raymond James & Associates Inc. "The increase in natural gas price appears to be tied to a positive data point related to industrial demand. Specifically, the Institute for Supply Management's factory index rose to 35.6 in January from 32.9 in the prior month, above the consensus estimate of 32.5." They noted, "Industrial demand accounts for roughly 30% of total US natural gas consumption."
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Daily trading volume on West Texas Intermediate has been coming off all of last week and [on Feb. 2] was dominated by short covering on the March-April spread and liquidation on gasoline (including the gasoline crack). Heavy trading action on these two relative values artificially supported March WTI until the last 30 minutes of trade [on the New York market] where March WTI readjusted to some of the weaker values along the price curve."
Jakob said last week's gasoline premium is declining amid growing expectations that a new contract between the unions and US refineries will be signed.
The price contango between the March and April contracts "fell fairly drastically" Feb. 2 and "appears to still inspire storage arbitrage," said analysts at Pritchard Capital Partners LLC in New Orleans.
Pritchard Capital cited reports that OPEC as a whole reduced production in January by 1.05 million b/d (3.5%) to 28.56 million b/d. However, the 11 OPEC members other than Iraq produced a total 26.2 million b/d or 1.35 million b/d more than their combined target quota of 24.84 million b/d.
On the other hand, the analysts said Saudi Arabia reduced output by 375,000 b/d to 8.02 million b/d in January or 26,000 b/d below its official quota of 8.05 million b/d.
Tristone Capital Inc., Calgary, an investment firm focused on oil and gas exploration and service companies, reiterated Feb. 3 its WTI price forecasts of $50/bbl this year and $70/bbl in 2010. "Given the ongoing incentive to store oil, inventories should continue to build, creating additional downside risk for crude oil prices in the first half of this year. We believe oil can trade below $35/bbl near-term, forcing high cost non-OPEC barrels off the market and accelerating a recovery to balance supply and demand and begin to destock high inventory levels. Our 2010 price is above strip, but looks at high compliance from OPEC and economic recovery in late 2009 setting the stage for oil market recovery into next year."
Natural gas
Natural gas prices were up in early trading Feb. 3 after rallying by 3.2% in the previous session.
Meanwhile, Pritchard Capital analysts noted the number of rotary rigs drilling for natural gas in the US dropped by 465 to 1,150 in recent weeks. If the gas rig count continues falling to 950, they said, "US production growth likely [will decline] by 1.5-2 bcfd year over year, perhaps accelerating to [a decline of] 4 bcfd by December." Current US gas supply is 57 bcfd. "Total US demand, conservatively, will likely fall by 1.5 bcfd this year, which assumes 3-5% decline in industrial and power generation and normal weather," analysts said.
They also pointed out continuing soft demand for LNG among the "Big 3" markets of Japan, South Korea, and Spain. "The balance is shifting," said Pritchard Capital analysts. "Prices are beginning to slide. Both Japan and South Korea overbought at the start of the winter season, so will be importing less going forward." As a result, they said, there may be a surge of LNG imports into the US in May and June—"perhaps running through the summer, driven by the need of LNG producers to move product to market, regardless of the price;" they said.
Tristone Capital slashed its 2009 gas price forecast to $4.25/MMbtu on the New York futures market, down from $7/MMbtu previously, and introduced its 2010 estimate at $6.75/MMbtu. "The depth of the US recession is taking its toll on industrial gas demand, loosening the supply-demand imbalance to 4-6 bcfd (above demand)," said Tristone Capital analysts.
"Assuming demand recovery begins in the second half and the time-lagged supply response materializes later this year, we see storage effectively full (3.8 tcf) in September and expect shut-ins to characterize the gas market this fall," they said. "Assuming a normal winter next year, ongoing tightening should improve market balance in spring 2010 and with it a recovery in North American gas markets in mid-2010."
Tristone analysts concluded, "We believe gas prices will deteriorate further in 2009, making investing in gas-weighted producers a risky proposition until the market rebalances. Although oil fundamentals are still weak, OPEC has shown surprising resolve toward their latest quota, which we believe will lead to achieving supply-demand balance ahead of natural gas."
In other news, the rebel Movement for the Emancipation of the Niger Delta in Nigeria called off a ceasefire following a military raid on the camp of one of its powerful warlords. MEND officials warned international oil companies to evacuate the delta region before Feb. 14.
Meanwhile, Jakob reported, "The world's powers will meet [Feb. 4] over the Iranian sanctions, but we would not expect great changes as the new US administration is still in set-up mode."
Energy prices
The March contract for benchmark US sweet, light crudes dropped $1.60 to $40.08/bbl Feb. 2 on the New York Mercantile Exchange. The April contract fell $2.21 to $43.92/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.60 to $40.08/bbl. The new front-month March contract for heating oil declined 9.16¢ to $1.34/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) lost 11.95¢ to $1.15/gal.
Natural gas for the same month climbed 14¢ to $4.56/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 19.5¢ to $4.57/MMbtu.
In London, the March IPE contract for North Sea Brent crude lost $2.06 to $43.82/bbl. The February gas oil contract fell $20.50 to $429/tonne.
The average price for OPEC's basket of 12 reference crudes increased by 60¢ to $42.64/bbl on Feb. 2.
Contact Sam Fletcher at [email protected].
