MARKET WATCH: Crude price declines after testing $50/bbl

Crude prices continued to fall Dec. 15 after first testing market resistance to $50/bbl in New York as traders focused on declining demand despite a general consensus that OPEC will soon cut production.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 16 -- Crude prices continued to fall Dec. 15 after first testing market resistance to $50/bbl in New York as traders focused on declining demand despite a general consensus that ministers of the Organization of Petroleum Exporting Countries will cut production by 1-2 million b/d at their Dec. 17 meeting in Oran, Algeria.

"Buyers of West Texas Intermediate were as shy at $50/bbl as sellers at $40/bbl 2 weeks ago," said Olivier Jakob at Petromatrix, Zug, Switzerland. "The fear of OPEC is being offset by the fear of the contango-induced stock builds." Prices of crude contracts are progressively higher each month through 2009 and into 2010.

Jakob noted that marine firm Frontline Ltd. estimates 50 million bbl of crude is now in floating storage aboard several very large crude carriers.

Meanwhile, the US Department of Labor said Dec. 15 that US consumer prices fell 1.7% in November—the largest single-month decline since February 1947. The previous record decline was in October. The latest decline was primarily due to a record 17% drop in energy prices, almost double the previous record of 8.6% in October.

OPEC outlook
In its latest monthly oil market report, released Dec. 16, OPEC said the average price of its basket of 13 reference crudes fell for the fifth consecutive month, down $19.40, or 28%, to $49.76/bbl in November. Prices continued spiraling down to $36.67/bbl in December, the lowest level since January 2005. On Dec. 15, OPEC's basket price was $42.53/bbl, up $1.21 for the day.

OPEC blames those losses on a weak world economy that triggered market fears of oil demand destruction. OPEC officials said their move to cut oil exports in November "lent stability to the marketplace," although crude prices continued to fall.

OPEC expects demand for its members' oil will average 30.2 million b/d in 2009, down 1.4 million b/d from 2008. It expects non-OPEC supply to increase by 100,000 b/d this year, a downward revision of 110,000 b/d from last month's estimate. Non-OPEC production is expected to increase 600,000 b/d in 2009. OPEC's natural gas liquids and nonconventional supplies also will add 600,000 b/d to 2009 production, officials said.

They forecast total world oil demand will be down 150,000 b/d in 2009 to an average 85.7 million b/d.

OPEC wants non-OPEC producer Russia to cut its production by 300,000 b/d and has suggested Azerbaijan, Syria, and Oman reduce their production as well. "This will be the first time in a decade that OPEC is coordinating efforts in a large way with outside exporters," said analysts in the Houston office of Raymond James & Associates Inc. But they question if OPEC will be successful. Norway has already refused to cooperate with OPEC, and analysts say any reduction by Russia would be due to natural production decline from underinvestment (OGJ Online, Dec. 15, 2008).

In New Orleans, analysts at Pritchard Capital Partners LLC said, "The bottom line is that Russia needs the money more and needs a higher oil price more than Norway. Russian crude production declined for an 11th straight month in November by 0.3% year-over-year to 9.82 million b/d."

Energy prices
The January contract for benchmark US sweet, light crudes traded at $44.10-50.05/bbl Dec. 15 before closing at $44.51/bbl, down $1.77 for the day on the New York Mercantile Exchange. That contract expires Dec. 19. The February contract lost $1.65 to $47.47/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.77 to $44.51/bbl. January heating oil declined by 3.33¢ to $1.46/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) dropped 4.08¢ to $1.04/gal.

Natural gas for the same month gained 15.7¢ to $5.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 18.5¢ to $5.76/MMbtu. Colder weather is forecast across most of the US until Dec. 24.

In London, the January IPE contract for North Sea Brent crude fell $1.81 to $44.60/bbl. January gas oil escalated by $26.50 to $484.50/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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