MARKET WATCH: Energy demand, prices both plummet

The front-month February contract for benchmark US crudes fell 6% to less than $40/bbl Dec. 22 amid market fears OPEC cannot cut production fast enough to offset plummeting oil demand.

Sam Fletcher
Senior Writer
HOUSTON, Dec. 23 -- The front-month February contract for benchmark US crudes fell 6% to less than $40/bbl Dec. 22 amid market fears the Organization of Petroleum Exporting Countries cannot cut production fast enough to offset plummeting oil demand.

"Two of the world's biggest oil importers reported significant year-over-year declines in oil demand. Japan, the world's third biggest oil importer, reported its November crude imports were down 17% from the previous year, and South Korea, the world's fifth biggest importer, reported that its oil consumption was down 12% in November," said analysts in the Houston office of Raymond James & Associates Inc.

In New Orleans, Pritchard Capital Partners LLC analysts said, "OPEC may be determined to stabilize oil prices, but with such poor demand it's hard to see how any supply-driven initiatives can have a positive impact on prices."

"Abu Dhabi verbally informed India's Bharat Petroleum Corp. Ltd. to expect a cut in oil supplies in January, while other OPEC producers, Saudi Arabia and Kuwait, have yet to inform BPCL on possible supply cuts," they said.

Pritchard Capital analysts said crude production by Petroleos Mexicanos fell 6.5% from year-ago levels in November. Pemex reduced its 2008 production outlook for the third time, down by 3.6% due to disruptions by hurricanes and the faster-than-expected decline of Cantarell field.

Nonetheless, February crude climbed above $40/bbl in early trading Dec. 23 in New York, "driven by a weak US dollar," they said.

Demand outlook
On the natural gas front, Raymond James analysts reported, "Even a historic winter storm that is dumping snow and ice through the Midwest and East Coast has not been enough to meaningfully drive low gas prices higher. The colder weather continues to take a backseat to economic concerns, which are now weighing heavily on industrial and power generation demand."

Pritchard Capital analysts said, "The gas market seems poised to reset itself," in a process that includes shutting in some production and a more than a 30% drop in the number of active land rigs in the US. They see "a 4-6 month lag time before recent well decline rates translate into production volume decreases. We may see gas prices around $5/Mcf before things get better."

Pritchard Capital also sees a shift from a supply-constrained market to a demand-constrained market for LNG.

"Global LNG prices on the spot market seem to be stabilizing [at] $8-9/MMbtu in the Atlantic Basin and in the $11-12 range in the Pacific Basin." With current prices at Henry Hub, La., spot market "well below the prices a year ago," LNG terminals at Lake Charles, La., and at Sabine Pass and Freeport in Texas remain inactive," analysts said.

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, "With the low oil prices and the low refining margins, the process of supply destruction is already in the works, and this is further evidenced by the falling trend of rotary rig utilization. Most of Wall Street is now targeting $30/bbl for West Texas Intermediate, a level which will only accelerate the supply destruction process in North America, making the US more dependent on 'foreign oil.'" More important, low oil prices "will be destroying production capacity, which will then allow for a reversal trade," Jakob said.

He added, "The [futures market] price of corn or soybean is holding much better than gasoline or heating oil, the ethanol processing margins are in the red, and the current oil prices also question the sustainability of biofuels in the supply and demand equation. The retail price of gasoline in the US is at the lowest level since early 2004 and with the gasoline crack giving back yesterday some of its recent gains, there should be some more improvement in the pump price for the US customer."

Energy prices
The February contract for benchmark US light, sweet crudes fell $2.45 to $39.91/bbl Dec. 22 on the New York Mercantile Exchange. The March contract dropped $2.28 to $42.88/bbl. On the US spot market, WTI at Cushing was down $3.06 to $30.81/bbl. Heating oil for January lost 5.05¢ to $1.34/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) dropped 8.31¢ to 89¢/gal.

Natural gas for the same month declined 4¢ to $5.29/MMbcf on NYMEX. On the US spot market, gas at Henry Hub, La., fell 27¢ to $5.41/MMbcf.

In London, the February IPE contract for North Sea Brent crude dropped $2.55 to $41.45/bbl. Gas oil for January was down $5 to $441/tonne.

The average price for OPEC's basket of 13 reference crudes lost 80¢ to $36.92/bbl. The OPEC Secretariat in Vienna will be closed the afternoon of Dec. 24 through Dec. 26. It also will close Dec. 1-Jan. 1 and on Jan. 6.

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