MARKET WATCH: Oil continues losing streak, falls below $70/bbl

Dec. 14, 2009
Crude prices continued falling Dec. 11 for the eighth consecutive session on the New York market—the longest losing streak since October 2003—as the US dollar hit a 2-month high against the euro on a better-than-expected Department of Commerce report that US retail sales rose 1.3% in November, the third advance in 4 months.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 14 -- Crude prices continued falling Dec. 11 for the eighth consecutive session on the New York market—the longest losing streak since October 2003—as the US dollar hit a 2-month high against the euro on a better-than-expected Department of Commerce report that US retail sales rose 1.3% in November, the third advance in 4 months.

The Reuters-University of Michigan consumer sentiment index also showed an unexpected increase to 73.4 in early December from 67.4 in November, adding to the dollar’s strength. Crude ended the week down 7.4%—the biggest loss in 11 weeks—dropping more than 9% this month to near 2-month lows.

Analysts in the Houston office of Raymond James & Associates Inc. reported Dec. 14, “Crude breached the $69/bbl mark this morning and is down 1% on speculation that demand may be slowing…even the dollar's retreat this morning can't seem to bump prices back above the $70/bbl mark.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts reported, “There will be very little support for global demand from the US any time soon. You can try to talk up a market all you like, but you can’t beat really dreadful demand numbers.” They added, “West Texas Intermediate is now back below Brent again, and when this happens it is rarely a good sign.”

The front-month natural gas contract was up 2.5% before the opening bell Dec. 14 on the New York market after climbing 13% last week. “Weather conditions may continue to support higher prices as the National Weather Service's 8-14 day outlook for the Dec. 21-27 period is calling for below-average temperatures across the eastern half the country,” said Raymond James analysts.

They added, “The biggest E&P acquisition in over 20 years is creating a pretty busy Monday morning.” In the largest US E&P deal in history, ExxonMobil Corp. announced the acquisition of independent XTO Energy Inc. in a $41 billion all-stock transaction (OGJ Online, Dec. 14, 2009).

“Exxon is certainly paying up in order get its hands on a leading domestic natural gas producer, with the deal representing a 25% premium to XTO Energy's current share price and roughly $3/Mcf [of gas equivalent] on a proved reserve basis. From a strategic standpoint, Exxon has increased its exposure to domestic shale plays—with XTO holding significant footprints in the Woodford, Barnett, Fayetteville, and Bakken (oily),” said Raymond James analysts.

Copenhagen conflict
Meanwhile, Raymond James analysts said, “The first week of the Copenhagen climate summit illustrated the gaping chasm between where countries stand on the central issue of who must cap carbon emissions and by how much. The main division continues to be between industrialized and developing countries over their relative carbon cuts. However, the developing group is by no means united, with major emerging markets (China, India, Brazil) taking a position that puts them at odds with smaller, poorer countries.”

The draft of a long-term action plan published Dec. 11 suggested 25-40% carbon cuts for industrialized countries by 2020. “But it's far from a done deal given dissatisfaction on both sides,” Raymond James analysts said. “Looking ahead to this week, negotiations will intensify towards [Dec. 18], the last official day of talks, and are likely to stretch into the weekend. The bottom line remains the same, though: Regardless of Copenhagen's conclusions, don't expect a binding treaty until at least mid-2010.”

They cited an article in the Toronto Star reporting Canada balked at the climate plan. “When it comes to making carbon reduction commitments, Canada has been among the most cautious industrialized countries, citing the key role of resource development (notably the oil sands) in its economy. One specific objection of Canada is that, as a country that ratified the Kyoto Protocol, it is being asked to commit to a greater carbon cut by 2020 than the US, which isn't covered by Kyoto,” analysts said.

Nonetheless, Nobuo Tanaka, executive director of the International Energy Agency, said, “While the details of a binding agreement may not be completely worked out in Copenhagen, it is more important than ever that participants send a strong, indicative, and ambitious signal that can guide energy investment and policy decisions globally.” He said, “This conference is the most important climate meeting to date, as we urgently need a framework that goes beyond 2012, the end of the Kyoto Protocol first commitment period. The economic crisis, with the resulting fall in global energy-related carbon dioxide emissions of around 3% in 2009, gives us a unique window of opportunity to change our current, highly unsustainable energy path.”

To limit the long-term concentration of greenhouse gases in the atmosphere to 450 ppm of CO2 equivalent, in line with a 2° C. increase in global temperature, he said, “The world would need to retire a significant portion of today’s coal-fired electricity plants before the end of their lifetime—by 2030, early closures around the world would amount to the equivalent of today’s total coal-based power generation in Japan, EU, and the US. Around 60% of global electricity production in 2030 would need to come from a mix of renewables (37%), nuclear (18%), and plants fitted with carbon capture and storage (5%). Another illustration is the dramatic shift needed in car sales, with hybrids, plug-in hybrids, and electric vehicles representing 60% of sales in 2030, from around 1% today.”

In other news, Raymond James analysts noted, “We've seen oil service costs fall on average 30-40% from the peak. Tack on efficiency improvements and eliminate the least economic gas wells (amounting to 30% to 50% fewer gas wells being drilled), and all of a sudden E&P companies are making good returns at $5/Mcfe gas prices. Even though many investors may have built in much higher gas price expectations over the coming years, natural gas prices in a $5/Mcfe range really [aren’t] the end of the world. In fact, most operators will earn a decent living in that environment, and the others will adapt (horizontal drilling, recompletions, etc.) or fade away.”

However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “In the week ending Dec. 2, cash assets hoarded by banks in the US decreased by $102 billion, but this comes after a strong increase in the previous week and maintains cash assets close to $1 trillion above the levels of 2007. There are still no signs of increased industrial loans.”

Energy prices
The January contract for benchmark US light, sweet crudes dropped 67¢ to $69.87/bbl Dec. 11 on the New York Mercantile Exchange. The February contract declined 37¢ to $71.95/bbl. On the US spot market, WTI at Cushing, Okla., was down 67¢ to $69.87/bbl.

Heating oil for December delivery increased 0.56¢ to $1.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month regained 0.65¢ but closed virtually unchanged at $1.84/gal.

The January contract for natural gas gave back 13.5¢ of its 40¢ jump in the previous session, settling at $5.16/MMbtu Dec. 11 on NYMEX. On the spot market, gas at Henry Hub, La., climbed 23¢ to $5.27/MMbtu.

In London, the January IPE contract for North Sea Brent inched up 2¢ to $71.88/bbl. Gas oil for January lost $5 to $582/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 58¢ to $70.85/bbl Dec. 11. So far this year, OPEC’s basket price has averaged $60.41/bbl compared with an average $94.45/bbl for all of 2008.

Contact Sam Fletcher at [email protected].