MARKET WATCH: Crude price rebounds pending OPEC meeting

Energy prices continued to waffle with the front-month benchmark US crudes contract rebounding above $71/bbl Oct. 17 in anticipation that OPEC will cut production at its Oct. 24 meeting in Vienna.

Oct 20th, 2008

Sam Fletcher
Senior Writer

HOUSTON, Oct. 20 -- Energy prices continued to waffle with the front-month benchmark US crudes contract rebounding above $71/bbl Oct. 17 in anticipation that the Organization of Petroleum Exporting Countries will cut production at its Oct. 24 meeting in Vienna.

In Houston, analysts for Raymond James & Associates Inc. reported oil prices were higher in premarket trading Oct. 20 on expectations that OPEC will reduce production quotas for the first time since December 2006. "Following the International Energy Agency's reduced 2009 oil demand forecast the week prior, OPEC lowered its outlook last week, now expecting consumption to be 450,000 b/d less than expected to 87 million b/d," Raymond James analysts said. "A few member nations have voiced their intentions of pushing for a cut in production, including Qatar, Iran, as well as OPEC's president Chekib Khelil who said that output could be slashed by as much as 2 million b/d."

The average price of OPEC's basket of benchmark crudes gained 48¢ to $63.82/bbl on Oct. 17. So far this year, the OPEC basket has averaged $106.13/bbl, up from $69.08/bbl for all of 2007.

In recent weeks, benchmark US crudes have been trading in New York for less than half of the record $147/bbl that it commanded in July. Olivier Jakob at Petromatrix, Zug, Switzerland, noted US crude fell as low as $68.57/bbl in intraday trade last week and closed Oct. 17 down $5.85/bbl for the week. Heating oil was down $3.24/bbl in the same period, while the contract for reformulated blend stock for oxygenate blending (RBOB) lost $5.92/bbl. Jakob said, "On the other hand, natural gas gained 3.9%" over the week. North Sea Brent crude for December was down $6.22/bbl for the week.

In a report issued Oct. 18, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "We believe OPEC production cuts are inevitable in this environment, but the experience of 1998 and 2001 suggests the cartel will struggle to cut production as fast as world growth is slowing."

Sieminski said, "We now expect global gross domestic product growth to slow to 1.2% in 2009, and that this will translate into flat-to-declining oil demand. Energy and industrial metals commodities will be major casualties in this environment." As a result, he said, "We expect oil prices will average only $60/bbl and could bottom out at $50/bbl in 2009 or early 2010."

Having already lowered its 2009 rig count forecast last month, Raymond James cut it again because "the economic situation has severely deteriorated," the analyst said. "Additionally, reported US natural gas storage injections remain bearish, despite more than 200 bcf of hurricane-related production shut-ins in the Gulf of Mexico." As a result, they said, "We now anticipate the US rig count will fall by more than 10% year-over-year in 2009 with a 40% peak-to-trough decline in the natural gas rig count. We expect the overall domestic rig count to fall 30% from its highs."

Raymond James analysts said, "Given our view that US natural gas prices will remain depressed into late 2009, we suspect the rig count should reach a bottom [by] mid-2010. As a result, we are initiating our 2010 average rig count forecast of 1,500, implying a 12.5% decrease from 2009. Between the reduced cash flows, the credit crunch, and the simple need to remove excess natural gas supply, we see no real way out of a severe slowdown in natural gas-directed activity in the US."

Energy prices
The November contract for benchmark US light, sweet crudes gained $2 to $71.85/bbl Oct. 17 on the New York Mercantile Exchange. The December contract increased $1.87 to $72.13/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2 to $71.85/bbl. Heating oil for November advanced by 4.56¢ to $2.13/gal on NYMEX. The November RBOB contract increased 4.41¢ to $1.67/gal at closing on Oct. 17.

The November natural gas contract gained 8.3¢ to 6.79/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 11¢ to $6.75/MMbtu.

In London, the November IPE contract for North Sea Brent increased $1.76 to $69.60/bbl. The November contract for gas oil was up $3.50 to $678/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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