Sam Fletcher
OGJ Senior Writer
HOUSTON, Oct. 9 -- Energy prices rose across the board Oct. 8 as the US dollar continued to flounder and traders shrugged off a bigger-than-expected injection that boosted US natural gas storage to a new record high.
The Energy Information Administration reported the injection of 69 bcf of natural gas into US underground storage in the week ended Oct. 2, boosting total gas in storage to 3.658 tcf, up 473 bcf from a year ago and 480 bcf above the 5-year average, with 5 more weeks yet to go before winter demand begins.
“The market has ignored the weak fundamentals of gas for the past several weeks, but we like to believe that supply-demand logic still holds true,” said analysts in the Houston office of Raymond James & Associates Inc.
In New Orleans, analysts at Pritchard Capital Partners LLC said, “The strength in natural gas was attributed to comments from Alcoa Inc. that global aluminum demand is stabilizing and that aluminum demand in China is ‘clearly back.’ Alcoa’s comments indicate that industrial activity could be picking up, and that should lead to increased industrial demand for natural gas—industrial demand for natural gas has been missing for the past year. In the past, a storage injection 15% greater than the estimate would have led to a 5-10% decline in natural gas, and that this did not happen is a positive for natural gas.”
The dollar dropped to a 14-month low against a basket of international currencies as investors turned their backs on that previous safe haven in favor of crude and gold. The falling dollar triggered “a tsunami of strength across commodities,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Right now we are in a perfect rising spiral. The weak dollar provides support to oil prices, which provide support to equities, which pressures the dollar and so on…as long as there is enough liquidity the spiral can continue because the walls of diversification do not exist anymore.”
He said, “The paradox of it all is that for the US consumer it will probably be one of the most expensive winters for heating oil prices (apart from winter 2007) despite record heating oil stocks and despite US refineries closing down because they can’t sell the stuff. Try and explain to Joe the Plumber that he’s got to pay a high price for his heating oil because the dollar is cheap and gold expensive.”
Pritchard Capital Partners said, “Crude rose on signs the US economy is improving and a weaker dollar. Additionally, a poor 30-year government bond auction helped commodities trade higher.” They said, “With the dollar making new lows and treasuries selling off, commodities and crude are benefiting. If the dollar and treasuries continue to sell off, crude and commodities should extend the rally [on Oct. 9].”
In Arlington, Va., analysts at FBR Capital Markets & Co. raised their price estimate for the just-completed third quarter to $68/bbl for oil from $60/bbl previously. However, they reduced their natural gas estimate to $3.17/Mcf from $3.25/Mcf.
“We are maintaining our fourth-quarter gas price estimate of $3.75/Mcf, as we believe that current cash Henry Hub prices of $3.20/Mcf—as opposed to the November New York Mercantile Exchange [price] of $5/Mcf—are reflective of realities of excess physical supply. For crude oil, we are adjusting our estimates to $70/bbl from $65/bbl for the fourth quarter and to $65/bbl from $55/bbl for 2010, as dollar instability and macroeconomic recovery ensue,” said FBRC analysts. “We note that the marginal cost of crude from the oil sands is around $65/bbl.”
FBRC analysts expect oil company executives to continue to talk about [gas] production deferment across North America. But they said, “In reality, we believe not much of it will come about.”
Chicontepec issue
Meanwhile, Pritchard Capital analysts reported, “Industry sources were surprised by the number of quick and inaccurate conclusions drawn on the street after a local Mexican paper El Universal reported that the recently formed National Hydrocarbons Commission (NHC) had ordered Petroleos Mexicanos (Pemex) to halt $2 billion worth of eight contracts drilling in the Chicontepec [basin].”
The story evolved from initial reports Oct. 8 the NHC had ordered Pemex to stop drilling in the basin, with subsequent reports becoming less and less draconian. “Industry sources indicate that Pemex had never heard of this initially and that the NHC really has no power to do anything, although Pemex will listen to them,” said Pritchard Capital analysts. “Another local newspaper Reforma now has comments from Esteban levin Balcells, corporate finance director of Pemex, saying that the Chicontepec is a big project that could not be suddenly stopped and that the review from the NHC would be incorporated but along with the Pemex E&P's own reports.”
They said, “We expect that reviews will take place, which is not surprising, and that there will be an update in mid-November when Pemex approves its budget.” The Chicontepec basin with 29 distinct fields spread over 2,400 sq miles northeast of Mexico City is potentially a large contributor to Pemex’s future production. It contains 54% of Mexico’s proved reserves outside the giant Cantarell field.
In other news, the US government reported the number of new claims for unemployment benefits fell to a 9-month low last week, and the total number of people receiving benefits declined. The Department of Commerce also reported US wholesalers posted the large increase in sales in more than a year, marking 12 consecutive months of increases.
Energy prices
The November contract for benchmark US light, sweet crudes increased $2.12 to $71.69/bbl Oct. 8 on NYMEX. The December contract gained $2.26 to $72.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.12 to $71.69/bbl. Heating oil for November delivery escalated 6.58¢ to $1.85/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month rose 5.94¢ to $1.78/gal.
The November natural gas contract increased 5.9¢ to $4.96/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 49.5¢ to $4.15/MMbtu.
In London, the November IPE contract for North Sea Brent crude was up $2.57 to $69.77/bbl. Gas oil for October gained $2.75 to $564.25/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes inched up 8¢ to $67.83/bbl on Oct. 8.
Contact Sam Fletcher at [email protected].
Rystad Energy.
