MARKET WATCH: OPEC meeting left oil markets uncertain

The front-month oil contract reduced earlier intraday losses but still closed down by 1¢/bbl Nov. 28 in the New York futures market, a day prior to the hastily called meeting of all OPEC ministers.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 1 -- The front-month crude contract reduced earlier intraday losses but still closed down by 1¢/bbl Nov. 28 in the New York futures market, a day prior to the hastily called consultation meeting of all ministers of the Organization of Petroleum Exporting Countries.

Non-Arab OPEC members were invited to sideline discussions of the oil market at the Nov. 29 meeting of the Organization of Arab Petroleum Exporting Countries in Cairo. They agreed to no additional adjustments in production pending further discussion at OPEC's regular meeting Dec. 17 in Oran, Algeria.

Meanwhile, OPEC Pres. Chakib Khelil said the group would assess members' compliance with the 1.5 million b/d production reduction that was approved Oct. 24 in Vienna. Several market analysts earlier said there was no need for OPEC to take additional action until the 1.5 million b/d cut, effective Nov. 1, was fully implemented. Khelil said current data indicates OPEC members are reducing production as agreed.

In the Houston office of Raymond James & Associates Inc., analysts reported oil prices were down in premarket trading Dec. 1. "Currently, oil inventories are as high as 55-56 days of forward demand, on the higher end of the 5-year range for this time of the year, and above OPEC's target of 52 days," they said.

OPEC's meeting
A statement issued by OPEC warned that oil demand prospects have deteriorated since its last agreement Oct. 24 to reduce production. "The clear implication is that another cut is coming," Raymond James analysts concluded.

OPEC called for Russia, Mexico, and Norway to join them in reducing production. Raymond James analysts said, "The Saudis publicly backed $75/bbl as a 'fair price' (referring to the OPEC basket, hence implying more than $85/bbl for West Texas Intermediate), based on this being the average marginal price on new projects globally; this figure was also endorsed by Venezuela, Iraq, Algeria, and Nigeria. Iran called for a 2 million b/d cut on Dec. 17."

But at Pritchard Capital Partners LLC in New Orleans, analysts observed, "World oil markets clearly reflect lack of credibility in OPEC, their ability to adhere to output cuts, and ability to support their target price range of $75[/bbl]."

However, at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "In the very short term, we believe that OPEC will succeed in stabilizing the oil price with production cuts, and in 2009 the average price of Brent crude oil will be $80/bbl."

OPEC hasn't had much success in maintaining price targets during previous recessions or other financial crisis. It has not maintained an official target price range for oil since 2005.

Economic outlook
The US Department of Labor's upcoming employment report for November is expected to show another large loss of jobs in the US. More than 1 million jobs have been eliminated through October of this year.

Raymond James analysts said, "A string of negative macroeconomic indicators continues to underscore the problems in the global economy—record-low Purchasing Manager's Indices (PMI), a measure of manufacturing activity for the eurozone, China, and Hong Kong; precipitous declines in Spanish, Swedish, French, and Japanese auto sales; and the 10-Year Treasury [note] hits a record-low yield of 2.87%."

China National Petroleum Corp. reported refined products demand in China has fallen sharply. "Last week, the World Bank and the Organization for Economic Cooperation and Development (OECD) cut their Chinese economic growth forecasts for 2009 from 9.2% to 7.5% and from 9.5% to 8%, respectively—significant reductions below 2007's growth of 11.9% and even the third quarter's growth of 9%," said Pritchard Capital analysts. "In light of this, we question whether recent efforts, including China's fourth interest rate cut since September and the $586 billion stimulus package announced Nov. 9, can outweigh the effects of collapsing demand for Chinese exports on oil and products demand."

Raymond James analysts reported, "The global financial meltdown is now likely causing meaningful oil demand destruction around the world. As a result, we are taking down our 2009 oil price forecast from $90/bbl to $60/bbl. We readily admit that our visibility and confidence in these new estimates are very low. There are simply too many moving parts to get any confidence in near-term oil prices."

Still, they said, "Intuition would suggest that the market's recent rush to liquidity has caused oil prices to overshoot on the downside. Unfortunately, we don't know whether or not the market liquidation of virtually all commodities is over. From a more fundamental perspective, it appears the oil market is already pricing in a 3% to 4% decline in global oil demand. From a historical perspective, that type of demand decline in a falling oil price world just seems too severe. That means we expect oil prices to gradually improve though 2009 as liquidity returns to the commodity markets and global capital infusions begin to drive global oil demand gradually higher."

Raymond James analysts remain bullish about oil in the long run, however. "The best cure for low oil prices is…low oil prices," they said. "As investment in new supply dwindles—both because of more limited available cash flow and also the credit crunch—non-OPEC supply will likely fall, and the prospects for growth from OPEC look anemic as well." Eventually an economic recovery will spur resurgence in global demand for energy.

"Higher prices will inevitably return," said KBC analysts. They expect world oil demand to grow by 21 million b/d between 2007 and 2030 at an annual average rate of nearly 1 million b/d, with China in the lead. "Total non-OPEC crude oil production will peak at the end of the next decade, and the world will need more oil from OPEC—biofuels will barely make a significant contribution," they predicted.

KBC analysts observed, "There is no doubt that 2008 will go down in history as one of the most extraordinary and turbulent of years. A year ago, nobody was predicting the scale of the catastrophe that has spread from the banking sector into the wider economy and the subsequent collapse of gross domestic product growth expectations. Almost the entire developed world is, to all intents and purposes, deep in recession with economic growth almost certain to be negative in 2009."

Many industry observers once thought that a jump in oil prices earlier this year "would take nearly a generation to happen and that such a price collapse was inconceivable: it is now becoming apparent that we live in a world that is much faster moving and interconnected than we appreciated," the analysts said.

Energy prices
The January contract for benchmark US light, sweet crudes traded at $51.12-55.98/bbl Nov. 28 before closing at $54.43/bbl, down just 1¢ in a shortened post-holiday session on the New York Mercantile Exchange. However, the February contract gained 12¢ to $55.82/bbl.

"In a short trading week, WTI managed to maintain for the second week in the row the support of $49.90/bbl. WTI gained more than $4.50/bbl in the week but lost $14/bbl in the month [of November on NYMEX]," said Olivier Jakob at Petromatrix, Zug, Switzerland. "WTI is $34/bbl lower than a year ago and $93/bbl lower than the summer peak."

Heating oil for December dropped 6.3¢ to $1.67/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) declined 3.36¢ to $1.15/gal. The January natural gas contract fell 36.8¢ to $6.51/MMbtu.

In London, the January IPE contract for North Sea Brent increased 36¢ to $53.49/bbl. The December contract for gas oil dropped $16.75 to $525.50/tonne.

The average price for OPEC's basket of 13 benchmark crudes dropped 9¢ to $47.29/bbl on Nov. 28. So far this year, OPEC's basket price has averaged $99.40/bbl, up from $69.08 for all of 2007.

According to data from the Energy Information Administration for the week ended Nov. 21, the average price of distillate in New York exceeded that of western Europe "for the first time since March 2008, which could signal an increase of imports or a decrease of exports, both of which would increase distillate inventories and reduce distillate margins," said Jacques H. Rousseau, an analyst at Back Bay Research LLC. "Distillate inventories are currently equal to the 5-year average for this calendar week."

NYMEX was closed Nov. 27 for the Thanksgiving holiday in the US.

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