MARKET WATCH: Crude prices continue to climb

Front-month oil futures prices climbed back above $90/bbl Jan. 23, a move generally attributed to growing optimism that the government-proposed economic stimulus plan will prevent a recession in the US.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 28 -- Front-month crude futures prices climbed back above $90/bbl Jan. 23, a move generally attributed to growing optimism that the government-proposed economic stimulus plan will prevent a recession in the US, the world's biggest consumer of energy.

Since the start of 2008, oil prices have fallen about 10% primarily because of US economic worries. In the Houston office of Raymond James & Associates Inc., however, analysts said, "The US is not as important to the global oil market as it used to be. While many are quick to point out that the US comprises 30% of total oil demand, it is more important to recognize that it is the developing world, particularly China, that is the key driver of today's oil demand growth."

Raymond James analysts said, "We believe that the market's negative response correlating a slowing US economy with ugly energy fundamentals is simply wrong." In its oil supply and demand model, Raymond James already incorporates a US recession along with an increase in production from the Organization of Petroleum Exporting Countries. "In the worst-case scenario of a US recession spilling over into the global economy, which would cause worldwide oil demand to decrease for the first time since 1983, OPEC would almost certainly cut oil supplies to protect its ever-increasing price floor (which we believe is now in the $70/bbl range)," the analysts said. "In reality, the only real impact on the oil market we envision from a US recession would be if one did not occur, causing higher-than-expected demand growth and a larger-than-expected draw on global inventories with a subsequently larger-than-expected increase in oil prices."

However, in early trading Jan. 28 in the New York market, the March crude contract was reported to have given back most of its gains from Jan. 25. "The short-term effects of the rate cut and stimulus package appear to be over," said Raymond James analyst.

Last week the crude futures market "started under a great global stress" but the March contract for benchmark US crudes ended the business week with a 79¢/bbl gain overall while North Sea Brent climbed by $1.67/bbl over the 5-day business week, said Olivier Jakob of Petromatrix GMBH, Zug, Switzerland.

"The data is suggesting that the large speculators were liquidating some of their long positions and hedging their short 'option put' positions. We have warned about the bearish accelerator below $85/bbl linked to short 'option put' hedging, and as we approached the levels early in the week, these dynamics started to occur," Jakob said. "The other side of this is that these additional futures shorts are hedges and not necessarily the result of a new bearish view or agenda, and if flat price starts to reverse upwards (as it started in the second part of the week) the futures short [contracts] are quickly bought back as the delta on 'the puts' decrease. Hence we would qualify the decrease of the speculative net length in futures as only moderately negative and not yet showing that the large speculators are turning to a new strong bearish bias," he said.

Energy prices
The March contract for benchmark US light, sweet crudes escalated by $1.30 to $90.71/bbl Jan. 25 on the New York Mercantile Exchange. The April contract shot up $1.48 to $90.47/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.30 to $90.71/bbl. Heating oil for February delivery climbed by 4.28¢ to $2.52/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) gained 3.54¢ to $2.32/gal.

The February natural gas contract popped up 18.1¢ to $7.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased by 1.5¢ to $7.84/MMbtu. "Natural gas rallied nearly 5% in the back half of last week, after falling almost 10% since its January peak," said Raymond James analysts. "The rally was spurred by colder than normal weather, over 15% colder than last year."

But natural gas prices were down in early trading Dec. 28 as traders again "voted their overcoats," with temperatures soon expected to heat up 15% above year-ago levels on the East Coast.

In London, the March IPE contract for North Sea Brent crude gained $1.83 to $90.90/bbl. The February gas oil contract jumped by $23.50 to $797.75/tonne.

The average price for OPEC's basket of 12 reference crudes escalated by $2.47 to $87.05/bbl on Jan. 25. So far this year, OPEC's basket price has averaged $88.59/bbl, up from an average $69.10/bbl for all of 2007.

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