MARKET WATCH: Crude oil falls from highest price this year, ending rally

Dec. 8, 2010
The January contract for benchmark US crude soared above $90/bbl to a new year-to-date high in early trading Dec. 7 in the New York market before closing below $89/bbl, ending a 4-day rally.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 8 -- The January contract for benchmark US crude soared above $90/bbl to a new year-to-date high in early trading Dec. 7 in the New York market before closing below $89/bbl, ending a 4-day rally.

The front-month natural gas contract fell 2.2% as forecasts waffled from colder to warmer weather in coming weeks, while gas inventories remain high. “Although prices have found some weather support lately, the supply overhang continues to exert downward pressure on natural gas,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

The Energy Information Administration increased its estimate of 2010 US natural gas supplies by 1%. “However, the larger-than-normal storage withdrawal over the next few weeks due to the forecasted below-normal temperatures could provide a much-needed weather rally, particularly if the weather projections start pointing towards a colder-than-normal start of the new year,” Sharma said.

The sale of crude during the Dec. 3 and Dec. 6 sessions “was so extreme at the back of the curve that it forced [monthly contracts for] 2015 to trade at deep discounts to [monthly contracts in] 2012,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Yesterday the selling came back to the front of the curve forcing deeper front contangos in WTI, heating oil, gas oil, and forcing gasoline and Brent out of backwardation.”

Jakob said the recent price rally was driven by large speculators who are “holding record net length in West Texas Intermediate and have another 8 trading days of normal market participation before we hit the low liquidity period of Christmas and New Year.” He said, “For the holiday period the main risk will come from China as the odds for an interest hike are increasing. India is also struggling with oil prices as it cannot pass them on to the consumers.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “The EIA raised its WTI price projection to $89/bbl by end of 2011, a $2/bbl increase.” In its latest short-term outlook, EIA predicted production outside the Organization of Petroleum Exporting Countries will fall by 280,000 b/d next year after a strong growth of 1 million b/d this year. However, EIA projects OPEC surplus capacity will remain close to 5 million b/d in 2011, up from 4.3 million b/d this year and 1.5 million b/d in 2008. “This suggests that OPEC is to maintain its strong influence on the oil market for a long period of time to come,” said Zhang.

Sharma said, however, “With crude now near $90/bbl, OPEC will probably feel some pressure during its Dec. 11 meeting in Ecuador to increase its production quotas.”

Analysts in the Houston office of Raymond James & Associates Inc. noted, “Ireland moved closer to adopting a budget that will cut €6 billion in spending. Skepticism for the strict budget, rising bond yields, and news of further investigations into insider trading caused the broader [equity] market to retrace its early gains from the tax cut extension.” As a result, the broader equities market remained relatively flat with energy stocks underperforming, they said.

US inventories
EIA reported Dec. 8 that commercial US crude inventories fell 3.8 million bbl to 355.9 million bbl in the week ended Dec. 3, exceeding Wall Street’s consensus for a 1.4 million bbl draw. Gasoline inventories increased 3.8 million bbl to 214 million bbl in the same period, counter to market expectations of a 300,000 bbl draw. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories gained 2.2 million bbl to 160.2 million bbl, compared with a consensus for a 900,000 bbl decline.

Imports of crude into the US increased 607,000 b/d to 9.1 million b/d that same week, said EIA. In the 4 weeks through Dec. 3, US imports of crude averaged 8.6 million b/d, up 80,000 b/d from the comparable period in 2009.

EIA reported input of crude into US averaged 14.9 million bbl for the week, a 786,000 b/d increase with units operating at 87.5% of capacity. Gasoline production increased to 9.4 million b/d. Distillate fuel production was up to 4.5 million b/d.

Energy prices
The January contract for benchmark US light, sweet crudes rose as high as $90.76/bbl in intraday trading Dec. 7 on the New York Mercantile Exchange before it closed at $88.69/bbl, down 69¢ for the day. The February contract dropped 52¢ to $89.22/bbl.

On the US spot market, WTI at Cushing, Okla., was down 69¢ to $88.69/bbl. Heating oil for January delivery slipped 0.55¢ to $2.47/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.87¢ to $2.32/gal.

The January natural gas contract fell 9.5¢ to $4.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 5¢ to $4.48/MMbtu.

In London, the January IPE contract for North Sea Brent crude decreased 6¢ to $91.39/bbl. Gas oil for December increased 25¢ to $766.25/tonne.

The OPEC’s Vienna headquarters was closed Dec. 8, so no update of its basket price was available.

Contact Sam Fletcher at [email protected].