MARKET WATCH: Lower temperatures boost natural gas prices

Natural gas prices climbed Nov. 17 in both the futures and spot markets with forecasts of lower temperatures in the east and northeast US into December.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 18 -- The benchmark crude futures contract closed at a new 22-month low Nov. 17 in New York, but natural gas prices climbed in both the futures and spot markets with forecasts of lower temperatures in the east and northeast US into December.

Japan is officially in a recession after its economy dipped 0.1% in the third quarter after dropping 0.3% in the second quarter, said government authorities. The European Union officially entered a recession last week.

In other news, Somalian pirates hijacked a supertanker, the 1,080-ft Sirius Star owned and operated by Vela International Marine Ltd., a subsidiary of Saudi Aramco (OGJ Online, Nov. 17, 2008). The tanker, with a crew of 25 and fully loaded with 2 million bbl of oil, was boarded and captured 450 nautical miles off the coast of Kenya and is the largest ship ever seized by pirates. The owner is attempting to negotiate for the release of the vessel and crew.

The value of the Sirius Star's cargo has been estimated at $110 million. According to the International Maritime Bureau, 88 ships were attacked and 36 were hijacked in Somalian waters since January. In previous cases, shipowners have been forced to ransom their vessels, cargos, and crews.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Somali pirates have taken the number one spot away from Nigerian pirates. We would see an oil impact only on a second hijack. Up to now it was the Suez route (Gulf of Aden) that was under pirate threat, but this attack was on the Cape route. The Indian Ocean is a bit wider than the Gulf of Aden so we don't see any real risk apart from vessels taking a longer route (further away from the African continent), which would add a bit of voyage time (vessel owners won't mind that much in an environment of low demand)."

Analysts in the Houston office of Raymond James & Associates Inc. reported, "Demand concerns continue to be the driving force behind the downward movement in prices. The global credit crisis continues to weigh heavily across the board—energy stocks, commodities, the broader market, etc.—as October was even worse than September. With oil prices below $60/bbl, the question everybody wants answered is whether or not the upcycle is over. We believe the longer-term picture for oil market fundamentals remains distinctly bullish. However, the magnitude and duration of the macroeconomically driven decline in energy demand is likely to remain a price overhang in the near term."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "With gasoline margins at or below the cash operating cost break-even level in most regions of the country, we expect refiners to reduce gasoline production throughout the remainder of 2008." He said, "Distillate remains the key variable to watch, since margins are still in the $20/bbl range. Distillate inventories are currently 1% above the 5-year mean for this calendar week, and we expect stocks to finish 2008 at about average levels."

OPEC's outlook
In its latest monthly report issued Nov. 17, the Organization of the Petroleum Exporting Countries reduced its 2009 oil demand forecast for the third consecutive month. It now expects world demand to grow by 500,000 b/d to 86.68 million b/d in 2009 and by 290,000 b/d to 86.19 million b/d in 2008.

"Due to the declining oil demand in the Organization for Economic Cooperation and Development, world oil demand in 2008 was revised down by 260,000 b/d," said OPEC officials. "Should the weather become warmer, then further downward revisions might be possible."

They said, "OECD countries are expected to experience a decline in oil demand, which is likely to pull total world oil demand growth down by more than 500,000 b/d in 2009, representing a revision of 200,000 b/d."

The report said non-OPEC oil supply is expected to increase 200,000 b/d to 49.7 million b/d in 2008. That's a downward revision of 92,000 b/d from the previous month's assessment. Demand for OPEC crude is expected to decline by 430,000 b/d to 31.8 million b/d in 2008 vs. 2007. In 2009, the demand for OPEC crude is expected to drop 910,000 b/d to 30.9 million b/d, the cartel reported.

At the UK-based Centre for Global Energy Studies, analysts said, "It took 40 months for oil prices to rise from $50/bbl to almost $150/bbl and just 4 months for them to fall back again. OPEC's emergency agreement last month to cut production by 1.5 million b/d has so far failed to halt the price slide and will not do so until real output cuts have been implemented. Oil demand forecasts continue to be revised downwards and a year-on-year contraction in global oil demand in 2008 and 2009 is now a very real possibility for the first time for 25 years."

Energy prices
The December contract for benchmark US sweet, light crudes dropped $2.09 to $54.95/bbl Nov. 17 on the New York Mercantile Exchange. The January contract fell by $2.11 to $55.49/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.09 to $54.95/bbl. Heating oil for December declined by 4.08¢ to $1.79/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) lost 6.45¢ to $1.17/gal.

With forecasts of colder weather, natural gas for the same month rebounded by 22.1¢ to $6.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 24¢ to $6.55/MMbtu.

In London, the January IPE contract for North Sea Brent crude dropped $1.93 to $52.31/bbl. The December gas oil contract gained $1.50 to $580/tonne.

The average price for OPEC's basket of 13 reference crudes lost $1.13 to $47.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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