MARKET WATCH: Energy prices dip as OPEC takes no action

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 16 -- Energy futures prices fell Mar. 13 in anticipation that the Organization of Petroleum Exporting Countries would not agree to a new production cut at its Mar. 15 meeting in Vienna.

Reuters news service reported President Barack Obama called King Abdullah of Saudi Arabia prior to that meeting. Earlier last week US Secretary of Energy Steven Chu said another cut could severely interfere with the recovery of the troubled global economy.

As was generally expected by market analysts, OPEC members did not announce another reduction of production quotas but instead called for stricter compliance with those already in effect. OPEC said secondary sources reported 79% compliance in February with its December decision, which in conjunction with an earlier quota adjustment was to have reduced output by 4.2 million b/d to 24.85 million b/d (OGJ Online, Mar. 16, 2009).

At their meeting, OPEC members expressed concern about the world economy, which they noted is "in the midst of the worst global economic recession in decades" and is expected to contract by 0.2% in 2009.

OPEC members said their production reductions so far have contributed to balancing the price of oil above $40/bbl. The average price for OPEC's basket of 12 reference crudes gained $1.91 to $44.15/bbl on Mar. 13. So far this year, OPEC's basket price has averaged $41.80/bbl. OPEC members scheduled their next ordinary meeting for Sept. 9 in Vienna.

In New Orleans, analysts at Pritchard Capital Partners LLC reported crude prices were down in early trading Mar. 16 as a result of OPEC's inaction. "OPEC is walking a fine line between cutting output to narrow supply imbalances and maintaining ample supply cushions to prevent potential future oil price increases," they said.

Analysts at the Centre for Global Energy Studies, London, said, "OPEC now appears to view its desired oil price of around $75/bbl as a long-term goal, rather than a short-term target and its latest decision indicates that it takes seriously the impact that any sudden surge in oil prices could have on the prospects for the global economy." A dip in oil prices "is likely to be only a short-term reaction to the decision," they said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Although history would suggest that it can take OPEC up to 15 months to stabilize the oil price, the narrowing contango in the futures curve indicates that OPEC cuts are taking hold. In view of the still fragile global economy, downside risks to the oil price will not be eliminated until the very end of 2009. However, looking into the second quarter we believe oil prices are starting to find a floor."

Sieminski said, "A more convincing floor in oil prices will require stability in global equity markets, a reduction in asset market volatility, another round of OPEC production cuts, and a resumption in US growth."

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said over the weekend, "Unless the underlying market dynamics change there is little likelihood of the [North Sea Brent crude] price breaking away from $45/bbl." They said, "OPEC countries need higher prices. A $45/bbl world does not satisfy their immediate budget needs and it certainly does nothing to ensure that the medium term investment in new capacity that is needed—particularly in the upstream—can happen."

KBC analysts claimed, "The reality is that in December, when OPEC announced its most recent production cut, world oil demand in 2009 was widely believed to be falling by 'only' 400,000 b/d." Last week the International Energy Agency said world demand for in 2009 will be 1.2 million b/d lower than in 2008. "Here at KBC Market Services, we believe the collapse will be 1.6 million b/d," analysts said.

"In other words, [OPEC's] existing 4.2 million b/d of cuts deal with yesterday's problem and further action is needed to deal with today's even worse environment. The odds must favor another production cut," they said.

In Houston, analysts at Raymond James & Associates Inc. said "broader markets" should be trading up Mar. 16 after Federal Reserve Board Chairman Ben Bernanke said in an earlier interview he will not allow another large multinational bank to fail. "The Fed chairman believes that the recession will likely end this year if the government's plan to revive the financial sector succeeds in stabilizing the markets and getting banks to lend more freely," analysts said.

Gas outlook
Raymond James analysts said discussions at the company's recent conference of institutional investors indicated "the market has—finally—woken up to the likelihood of a gas price meltdown this summer." They said, "The only real debate we are seeing is over the level of improvement (or lack thereof) in 2010, and we readily admit that visibility that far is minimal. On the oil side, things are almost the polar opposite. Investors share our uncertainty over the near-term but in general perceive the real prospect of a supply-driven price recovery further down the road."

The front-month natural gas contract fell Mar. 13 "driven by above-normal temperatures forecast for the Midwest and Northeast in the coming days," said Pritchard Capital analysts.

They also reported, "Japan (world's biggest user of LNG) is seeking to divert as many as six cargoes of the LNG from Indonesia over the course of this year as demand slows. Japan is very orderly on how they order LNG deliveries, so they're simply planning ahead. Net effect is supplies shift westward to India and China initially; new supplies soak up demand, then continue to shift further westward, ultimately to the US."

They added, "US storage eventually gets filled by late summer-early Fall, prices decline acutely, ultimately setting up for much higher natural gas prices later in the year.

Energy prices
The April contract for benchmark US light, sweet crudes traded as high as $48.14/bbl Mar. 13 before closing at $46.25/bbl, down 78¢ for the day on the New York Mercantile Exchange. The May contract lost 94¢ to $47.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 78¢ to $46.25/bbl. Heating oil for April delivery declined 2.92¢ to $1.20/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.72¢ to $1.35/gal.

Natural gas for the same month dropped 6.3¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., also finished at $3.93/MMbtu, up 7.5¢ for the day.

In London, the April IPE contract for North Sea Brent crude lost 16¢ to $44.93/bbl. The April gas oil contract jumped $21.75 to $390/tonne.

Contact Sam Fletcher at samf@ogjonline.com.