MARKET WATCH: Crude hits $100/bbl in intraday trading

The front-month crude contract hit $100/bbl in early afternoon trading Jan. 2 before settling at a still-record closing above $99/bbl on NYMEX.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 3 -- The front-month crude contract hit $100/bbl in early afternoon trading Jan. 2 before settling at a still-record closing above $99/bbl in the first trading session of 2008 on the New York Mercantile Exchange.

"The oil bulls are starting 2008 off with a bang. After numerous attempts…oil finally reached the $100/bbl level. News of increased fighting in Nigeria has helped spark this recent rally," said analysts in the Houston offices of Raymond James & Associates Inc.

A militant warlord whose camps were attacked Dec. 30 by Nigerian military helicopters retaliated Jan. 1 with attacks on two police stations and a hotel in Port Harcourt that left at least 13 people dead (OGJ Online, Jan. 2, 2008). Elsewhere, a suicide bomb attack on a police station in Algeria, another member of the Organization of Petroleum Exporting Countries, killed at least four police officers and wounded 20 people. Political tensions are high in Pakistan following the recent assassination of former Prime Minister Benazir Bhutto, and elections originally scheduled for Jan. 8 have been rescheduled for Feb. 18.

However, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "The $100/bbl print of yesterday was only a controversial one lot transaction done on the floor away from computer trading, hence the real technical test of $100/bbl is still to be done. The product cracks and the time spreads have been relatively stable and are providing no evidence that yesterday's rally is due to any crisis on physical oil."

He said, "While crude oil at $100/bbl makes a nice headline, the story is not about oil but about commodities." He noted futures market prices for soybeans "made a 34-year high" while rice and gold "were printing new records." Jakob said, "We expected a strong start of the year for commodities on the back of passive investment flows, and the tone of the first trading day of the year is confirming the trend. Pension funds will allocate more investment to commodities during the first quarter while reducing exposure to equities."

Jakob said, "Technically the oil market remains also in the positive momentum that was developed in the low [trading] volume of the holidays, and algorithmic models could trigger more buying on any successful break of $100/bbl."

Raymond James analysts said, "Also putting upward pressure on crude prices is the worry that OPEC has minimal spare capacity. Shokri Ghanem, the chairman of Libya's National Oil Corp., recently stated, 'OPEC's production is already close to maximum capacity, and the organization can do nothing to curb prices.' However, Indonesia, the second-smallest OPEC producer, has announced its intention to request a 500,000 b/d production increase during OPEC's Feb. 1 meeting."

Jakob said, however, "OPEC is right to say that the price of oil is driven by financial flows rather than supply and demand, but they are wrong to say that they can not do anything about it. It would need either a much stronger US dollar or a wide contango to bring enough speculators back to the short side to offset the buying coming from pension funds. OPEC can not do much about the dollar, but it has the power do something about moving the current backwardation back to a contango. For that, OPEC would need the resolve to oversupply rather than supply, but it has not shown yet such intention." He said passive investment flows will not stay idle until OPEC's next meeting, "hence the risk remains on the upside."

US inventories
Also fueling the energy price rally were market expectations of another draw on commercial crude inventories. The Energy Information Administration reported Jan. 3 US crude stocks plunged 4 million bbl to 289.6 million bbl during the week ended Dec. 28, well below market expectations of a 1.7 million bbl drop. It marked the seventh consecutive week that US crude inventories have fallen. Gasoline inventories gained 1.9 million bbl to 207.8 million bbl in the same week, vs. Wall Street expectations of a 500,000 bbl build. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories gained 600,000 bbl to 127.2 million bbl, vs. a consensus of 300,000 bbl. Propane and propylene inventories decreased by 1.7 million bbl to 54.4 million bbl during the week.

Imports of crude into the US crude oil increased 240,000 b/d to 10 million b/d in the same period. The input of crude into the US refining system was up 164,000 b/d to 15.4 million b/d, with refineries operating at 89.4% of capacity. Gasoline production climbed to 9.1 million b/d, while distillate fuel production fell to 4.3 million b/d.

Although the latest government data showed "another strong week for demand" for this time of year, it was not enough to offset rising supply, resulting in an overall increase to refined product inventories, said Jacques H. Rousseau at Back Bay Research LCC, a research partner for Soleil Securities Corp. He said, "We expect this negative data trend to continue through January, and coupled with our view that consensus refiner earnings expectations for [fourth quarter 2007] are too high, we believe refining margins and stock prices should remain under pressure this month."

Energy prices
After hitting $100/bbl, the February crude contract settled Jan. 2 at $99.62/bbl, up $3.64 on NYMEX. The previous intraday high for a front-month crude contract was $99.29/bbl on Nov. 21. The March contract jumped by $3.55 to $99.33/bbl Jan. 2. On the US spot market, West Texas Intermediate at Cushing, Okla., closed at $99.63/bbl. The new front-month February heating oil contract gained 9.1¢ to $2.74/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) increased 7.81¢ to $2.57/gal.

The February natural gas contract escalated by 36.7¢ to $7.85/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 31.5¢ to $7.78/MMbtu.

In London, the February IPE contract for North Sea Brent advanced by $3.99 to $97.84/bbl. Gas oil for January gained $15.75 to $855/tonne.

The average price of OPEC's basket of 12 benchmark crudes increased $1.24 to $92.06/bbl on Jan. 2.

Contact Sam Fletcher at samf@ogjonline.com.

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