Sam Fletcher
Senior Writer
HOUSTON, Nov. 26 -- Energy prices fell Nov. 25, giving up much of the gains from the previous trading session as a US Department of Commerce report of a larger-than-expected contraction of the US economy in the third quarter fanned fears of declining demand for fuel.
Commerce officials said the economy contracted at a real annual rate of 0.5% in the last quarter, surpassing an initial estimate of 0.3%. Some market analysts expect the current quarter to be even worse. The US real gross domestic product has grown 2% over the past four quarters.
"It was mainly the energy sector that was giving back gains," said Olivier Jakob at Petromatrix, Zug, Switzerland. The Dow Jones Industrial Average managed to maintain its gains from a 2-day rally, however, and the Volatility Index "is trending to the lows of the range seen since mid-October," he said. "China provided an overnight surprise rate cut, which could be a sentiment booster to global markets looking for confirmation of coordinated efforts to stabilize the world economy." Crude and natural gas prices were up slightly in early trading Nov. 26.
In New Orleans, Pritchard Capital Partners LLC said, "It is becoming fashionable to be negative in this market. We believe that this is the time to be positive."
Based on an analysis of the Oil Service Index (OSX) in previous economic cycles, Pritchard Capital analysts said, "Data such as rig counts and commodity prices can only explain a fraction of the current historical sell-off anomaly. Instead, we believe that the root cause of this unprecedented sell-off [of oil industry corporate stocks] has multiple dimensions, not simply oil and gas fundamentals. We see this as more of an economic phenomenon, a credit crisis, a strong dollar, etc."
The analyst continued, "We are not attempting to rebut that short-term pressures on service stocks could continue. We also see pockets of our universe subject to more headwinds than tailwinds over the next several months. However, the cataclysmic downward movements suggest a long-term binary result, that these companies are either going bankrupt or that this is the buying opportunity of a lifetime."
In London, analysts at Barclays Capital Inc. said even major international producers will have to take on debt, spend cash balances, or cut costs if oil prices average $50/bbl in 2009.
Meanwhile, Jakob reported, "West Texas Intermediate is now pricing right on the dollar-correlated value and in order to continue in its downward trend, it will need to be able to bring the Dollar Index with it. Over the last few days, oil and the dollar have gone on diverging momentum, and this relationship will require a stronger watch than in recent weeks."
Jakob said, "As expected, with the narrowing of the WTI premium to Brent [crude from the North Sea], the reformulated blend stock for oxygenate blending (RBOB) crack has improved to offset some of the lost crude oil arbitrage and this has helped the 3-2-1 refinery margin to improve by slightly more than $1/bbl. The Naphtha crack is also bottoming, and any signs of sustained improvement there will need to be monitored as it would also bring some support to gasoline."
US inventories
The Energy Information Administration said Nov. 26 commercial US crude inventories shot up by 7.3 million bbl to 320.8 million bbl in the week ended Nov. 21, far outstripping an expected increase of 600,000 bbl. Gasoline stocks escalated by 1.9 million bbl to 200.5 million bbl during the same period vs. a Wall Street consensus for a build of 200,000 bbl. Distillate fuel inventories dropped 200,000 million bbl to 126.7 million bbl, exactly in line with analysts' outlook.
Imports of US crude increased 1.1 million b/d to 11 million b/d in the same week. The input of crude into US refineries was up 280,000 b/d to 14.8 million b/d, with units operating at 86.2% of capacity. Gasoline production rose to 9 million b/d. Distillate fuel production increased to 4.6 million b/d.
EIA also reported ahead of the Nov. 27 US Thanksgiving holiday the first withdrawal of natural gas from US underground storage for this winter season. The larger-than-expected withdrawal of 66 bcf left 3.4 tcf of working gas in storage as of Nov. 21. That's down 109 bcf from the same period last year but 88 bcf above the 5-year average. Meanwhile, Pritchard Capital analysts report US production of natural gas is expected to increase by 1.5 bcfd in 2009 in face of declining demand. Analysts also said LNG imports into the US could climb to 2007 levels of 450 bcf "as increased liquefaction capacity is being met by sluggish demand from Japanese and Korean markets of late."
Meanwhile, ministers of the Organization of Petroleum Exporting Countries will meet Nov. 29 in Cairo. The consensus is that they will agree to cut production by another 1 million b/d, "but uncertainties abound on where cuts come from," said Pritchard Capital analysts. "Norway has no specific plans to cut oil production or join an effort by OPEC members to curb output."
Energy prices
The January contract for benchmark US light, sweet crudes dropped $3.73 to $50.77/bbl Nov. 25 on the New York Mercantile Exchange. The February contract fell $3.61 to $52.01/bbl. On the US spot market, WTI at Cushing, Okla., was down $3.53 to $49.77/bbl. The December RBOB contract declined 4.76¢ to $1.09/gal on NYMEX. Heating oil for the same month lost 8.56¢ to $1.70/gal.
The January natural gas contract fell 44.1¢ to $6.39/MMbtu on NYMEX, despite predictions of colder weather. On the US spot market, gas at Henry Hub, La., dropped 15¢ to $6.70/MMbtu.
In London, the January IPE contract for North Sea Brent crude lost $3.58 to $50.35/bbl. Gas oil for December fell $20.75 to $532.75/tonne.
The average price for OPEC's basket of 13 reference crudes gained $1.05 to $45.53/bbl on Nov. 25.
Contact Sam Fletcher at [email protected].
