MARKET WATCH: Despite cold weather across US, gas price drops as season end nears

Feb. 4, 2011
As cold weather swept the nation causing iced highways and rolling power blackouts on the Gulf Coast, natural gas dropped 2.1% in the New York market Feb. 3 as traders focused on the approaching end of winter's peak heating demand.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 4 -- As cold weather swept the nation causing iced highways and rolling power blackouts on the Gulf Coast, natural gas dropped 2.1% in the New York market Feb. 3 as traders focused on the approaching end of winter's peak heating demand.

“Estimates for supply outages due to the extreme weather conditions and well freeze-offs are now ranging anywhere from 3 bcfd to 5 bcfd,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “However the inclement weather has eroded demand by bringing down the nation’s commercial activity and due to the power outages. Prices have softened since the 15-days-out weather outlook doesn’t look as supportive with the temperatures projected to warm-up to the normal to above-normal levels across much of the country.”

Adam Sieminski, chief energy economist at Deutsche Bank's global markets and commodities research department, said, “Implied supply-demand balances from the latest Energy Information Administration storage report suggest that US natural gas fundamentals have weakened, but the shift was unusual and requires further data confirmation over the next few weeks.”

Oil prices weaken
Oil also weakened as a drop in the euro’s value against the US dollar triggered the first price decline in five sessions for North Sea Brent crude, which still remained above $101/bbl. In New York, crude futures prices “rallied early on continued concerns that Egyptian turmoil could spread and disrupt supply shipments, but strength in the dollar left the commodity down 0.4% on the day,” said analysts in the Houston office of Raymond James & Associates Inc.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, noted, “The West Texas Intermediate-Brent spread narrowed slightly to $11.21/bbl [in Brent’s favor]. Term structures for WTI and Brent remained broadly unchanged.”

The euro declined 1.38% after Jean-Claude Trichet, president of the European Central Bank, “quashed market expectations of an imminent rise in interest rates in the eurozone,” said Zhang. That “dragged oil lower, albeit temporarily,” he said.

However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “On a weekly basis the euro-dollar [valuation] is unchanged as the drop of yesterday only erased the gains of the run-up to the ECB meeting.” On the other hand, he said, “[Chairman of the US Federal Reserve Ben] Bernanke was much more predictable with his statements that QE2 [the second phase of the Fed’s quantitative easing program to stimulate the economy] is not doing much for unemployment but, boy, is it good for the US stock market; inflation does not exist, and if you are not happy with commodity inflation just revalue your currency.”

In the interim, Jakob said, “Indonesia made a surprise increase in interest rates overnight as it struggles to combat inflation.”

Sieminski said, “January data on crude oil prices vs. the Standard & Poor’s 500 index and the US dollar suggest that fundamentals are overtaking financials as the key price drivers.”

Egypt’s influence
Siemenski said, “The specter of Middle East oil supply disruption risk materialized over the past week with the unrest in Egypt. Though better known as a supplier…the region's products balance has narrowed given robust oil demand growth thanks to subsidized fuel price regimes and strong economic growth. Consequently, the region has grown as an import destination.”

Zhang said, “We expect the oil market to continue to be dominated by the unrest in the Middle East and North Africa region, which is likely to keep prices well supported and likely rather volatile.”

Sharma at Pritchard Capital Partners said, “Prices remain propped up on the perception of higher geopolitical risk as the unrest in Egypt is becoming violent due to the clashes between pro- and antigovernment protesters. The quick turn of events in Egypt has highlighted the possibility of similar unrest spreading in other authoritarian regimes such as Saudi Arabia; and the longer the Egyptian turmoil continues, the greater the possibility of the simmering tensions in other Middle-Eastern countries coming to the forefront.”

On Jan. 28, “pictures of burning police cars [in Cairo] and rumors sent out from New York about the Suez Canal about to be shut sent crude oil prices $5/bbl higher,” Jakob said. But since then, he observed, there has been “no visible threat to the passage of the Suez or in the throughput in the Sumed pipeline, while there has not been any uprising in Saudi Arabia or Kuwait. Zero risk does not exist in oil markets, but be it in Tunisia or in Egypt, the military is still in control, and the Egyptian army understands the importance of the Suez and the Sumed.”

As far as political turmoil spreading to Saudi Arabia, he said, “We are not ready to pay a monthly contango of $2.60/bbl in WTI or buy Brent at $102/bbl hoping for an uprising there.”

Jakob reported, “Technically, WTI is stalling. Despite all the events in Egypt, it has not been able to find enough follow-through buying to break on a closing basis the recent high at $92.58/bbl that was set before the uprising in Cairo. ‘The Day of Rage,’ ‘the Day of Departure,’ the day of this and that, for now ‘the Day of Saudi Arabia’ or ‘the Day of Suez’ has not materialized, and markets could start to be tired of making extrapolations about political events in Egypt while the cost of carry is getting more expensive.”

He said, “Brent had a greater technical momentum, but a lot of the Brent strength is due to the explosion of its premium to WTI. Cash differentials in Europe have not been particularly strong, and the Brent premium to WTI has been narrowing slightly over the last 2 days. The narrowing of the WTI front contango and widening of the front Brent contango could be an indication that some of the [factors] on Brent and WTI are starting to be unwound. Volatility on the Brent-WTI has been exceptionally high, and we have therefore to be careful of the risk of trend reversal on that spread.”

The main resistance on WTI remains $92.58/bbl “and for support we will have to watch the close of last week at $89.34/bbl, and below that the key support for the weekly charts remains $87.15/bbl,” said Jakob. “On Brent the main support levels to watch are $100/bbl for the headlines it will create if broken to the downside, and then $99.20/bbl.”

Energy prices
The March contract for benchmark US light, sweet crudes lost 32¢ to $90.54/bbl Feb. 3 on the New York Mercantile Exchange. The April contract dropped 44¢ to $93.24/bbl. On the US spot market, WTI at Cushing, Okla., was down 32¢ to $90.54/bbl. Heating oil for March delivery declined 1.33¢ to $2.77/ gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, inched up 0.49¢ but closed essentially unchanged at a rounded $2.50/gal.

The March contract for natural gas fell 9.2¢ to $4.34/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 13¢ to $4.69/MMbtu.

In London, the March IPE contract for Brent crude dropped 58¢ from a 28-month high to close at $101.76/bbl. Gas oil for February climbed $2.75 to $860.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 5¢ to $97.71/bbl.

Contact Sam Fletcher at [email protected].