MARKET WATCH: Crude again tops $100/bbl in strong rally

Oil prices continued to climb Sept. 19, with the front-month crude contract closing above $100/bbl in the strongest 3-day rally since 1998 in the New York market.

Sep 22nd, 2008

Sam Fletcher
Senior Writer

HOUSTON, Sept. 22 -- Oil prices continued to climb Sept. 19, with the front-month crude contract closing above $100/bbl in the strongest 3-day rally since 1998 in the New York market.

Despite losses totaling $10.03/bbl over the first two trading sessions, the front-month crude contract finished the week $3.37/bbl higher than it started—"a number that hides a $4.30/bbl rally in the last 10 min" of the Sept. 19 session and a $14.74/bbl difference in the range between bottom and top intraday prices through the week, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Volatility in the Sept. 19 trading session in New York focused primarily on the October crude contract scheduled to expire at the end of trading Sept. 22, with the November contract finishing the week at only $1.50/bbl higher. In London, the November IPE contract for North Sea Brent crude gained only 23¢/bbl through the week. Still, both Brent and benchmark US crude "made a strong gain from the lows of the week," Jakob said. The front-month natural gas contract gained 2.2% in the same period, but front-month heating oil prices were lower by $1.70/bbl at the end of the week, while reformulated blend stock for oxygenate blending (RBOB) declined by $7.14/bbl through the week.

The latest jump in energy prices followed a Sept. 18 night meeting of US Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke with House and Senate leaders to recommend a $700 billion capital injection to purchase bad mortgage debt from financial companies. "The proposal is now in the hands of Congress, with a vote expected this week, said analysts in the Houston office of Raymond James & Associates Inc. "Attention will be focused on the outcome, likely setting the stage for another volatile week in the markets. Natural gas, meanwhile, is little-changed this morning."

'Demand weakens daily'
In its Sept. 22 report, the Centre for Global Energy Studies (CGES), London, said, "The outlook for oil demand is weakening almost daily, shifting the sentiment of oil markets from bullish to bearish. Oil consumption in the Organization for Economic Cooperation and Development is down 1 million b/d year-on-year and China's contribution to oil demand growth is set to falter, with Sinopec reportedly planning to cut crude oil imports by 8-10% (around 240,000 b/d) until the end of the year in order to draw down stocks built up ahead of the Olympic Games. Should the turmoil in financial markets widen, as many believe it must, demand for Asia's merchandise exports will be hit, undermining the robust economic growth that has spurred the region's oil consumption."

The price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes has averaged $108.54/bbl, up from $69.08/bbl for all of 2007. However, OPEC's price "has fallen more than 36% from its peak in July and is now below the level at which it started the year," said CGES. "All member countries of the producer group have quickly become used to the astronomically high revenues brought by prices above $100/bbl, while some have come to rely on such revenues to meet growing economic needs, adding a sense of urgency to their calls for a cut in production at this month's OPEC meeting."

At that meeting OPEC members agreed to abide by the September 2007 production allocations, which according to OPEC's secretary-general would reduce supply by 520,000 b/d of over-production. However, allocations for individual OPEC members were swiftly withdrawn last September, following Venezuelan objections, creating uncertainty as to what the recent agreement will really mean in practice," said CGES.

CGES said, "Saudi Arabia's commitment to reducing its production is certainly taken seriously in OPEC circles and the Kingdom's record of implementing agreed output changes is generally good. However, a number of press reports have cited unnamed officials as saying that Saudi Arabia will continue its policy of supplying as much oil as its customers want to lift. Although it cut the discounts against benchmark grades for its crudes in August and September, it has increased them slightly for October, suggesting that we may see a relatively small cut in Saudi Arabia's output. Figures published by Oil Movements do not suggest that there has been a rush to cut production, indicating that liftings of oil from OPEC member countries will rise in the first week of October, after falling in September. The group's production is already down by around 300,000 b/d as a result of the latest attacks on Nigeria's oil infrastructure."

Rebel group Movement for the Emancipation of the Niger Delta declared a unilateral ceasefire Sept. 21 after a week of attacks on oil industry targets in Nigeria. MEND claimed responsibility for six attacks against targets operated by Royal Dutch Shell PLC, but the company confirmed only two. Nigerian officials said MEND attacks last week shut in more than 100,000 b/d of Shell production. On Sept. 19, Shell declared a second force majeure on Bonny Light exports.

Gulf Coast outlook
As of midday Sept. 19, the US Minerals Management Service reported 262 of the 717 manned production platforms and 6 of the 121 mobile offshore rigs in the Gulf of Mexico were still without crews. MMS said 89.2% of the oil and 75.4% of the natural gas normally produced from federal leases in the gulf remained shut in.

The Department of Energy reported 9 refineries (total capacity of 2.27 million b/d) remain shut down as a result of Hurricane Ike and another 12 refineries (total capacity of 2.95 million b/d) are running at reduced rates. DOE said 8 natural gas processing plants (5.08 bcfd) in Texas and Louisiana were shut down; another 30 plants (12.38 bcfd total capacity) were restarting or operating at reduced runs. As of Sept. 21, 8% of Texas remained without electrical power.

Raymond James analysts said most of the storm damage reported by the exploration and production companies they follow was primarily to offshore platforms around the Eugene Island and Vermillion blocks just south of Louisiana (as well as some minor platform shut-ins in the East Cameron area). "Much of the production from the gulf remains offline. However, onshore production shut-ins have not had the same attention as those in the gulf—something we believe the market is underestimating, especially for producers in the Barnett, East Texas, and west Louisiana regions where many operators took production down for safety reasons and due to power outages, certain pipelines and processing facilities are still down," they said. "While drilling activity likely has not been materially affected, we should hear from various onshore operators about the outcome of curtailments on takeaway and facilities. Just last week, Goodrich Petroleum noted that the effects of the storm persisted due to these power outages, something that will definitely surface with other operators in the same area."

Analysts at Raymond James still expect weakness in the 2009 rig count. "Our 2009 rig count forecast stands at 1,895 active drilling rigs, down about 1% from our forecast for 2008. Despite the negligible change, we think the 2009 natural gas-related rig count will fall a whopping 20% peak to trough, starting in early 2009. Strong oil drilling activity and the momentum from earlier natural gas price strength should carry strong US drilling activity levels through the end of the year. However, we remain very concerned about 2009 natural gas prices and believe that the natural gas portion of the rig count should fall by 300 rigs starting in early 2009."

Energy prices
The October contract for benchmark US light, sweet crudes shot up by $6.67 to $104.55/bbl Sept. 19 on the New York Mercantile Exchange, having traded at $97.39-105.25/bbl during that session. The November contract gained $5.21 to $102.75/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $6.67 to $104.55/bbl. Heating oil for October delivery increased 11.54¢ to $2.90/gal on NYMEX. RBOB for the same month was up 11.73¢ to $2.60/gal.

The October natural gas contract lost 9¢ to $7.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 25.5¢ to $7.85/MMbtu.

North Sea Brent crude for November gained $4.42 to $99.61/bbl. Gas oil for October increased $6.50 to $906.50/tonne.

The average price for OPEC's basket of crudes climbed by $2.33 to $91.72/bbl on Sept. 19.

Contact Sam Fletcher at samf@ogjonline.com.

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