MARKET WATCH: Crude prices rebound above $45/bbl on NY market

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 9 -- Energy prices generally rebounded Mar. 6, in many cases wiping out losses from the previous session as traders shrugged off growing unemployment numbers and focused instead on possibly additional production cuts by the Organization of Petroleum Exporting Countries at its scheduled meeting Mar. 15.

The Labor Department reported Mar. 6 the US unemployment rate increased to 8.1% in February, the highest since late 1983. The US dollar also declined in value.

In Houston, however, analysts at Raymond James & Associates Inc. reported Mar. 9 crude prices were down in premarket trading, "despite further indications from OPEC for an additional 800,000 b/d quota decrease."

At Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., analysts warned, "The down cycle will be deeper and longer than most expect, with oil consumption falling for 3 years—the longest period since the early 1980s." They said, "The steep drop in oil prices and limited access to capital will further reduce exploration and production capital spending. Deflation will take years, not quarters, to set in; thus, we expect a U-shaped cycle, not a V-shaped recovery as some expect."

Oil prices and supplies
At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "It is becoming clear that Brent crude oil prices hovering around $45/bbl are not good for producers whether they be national oil companies or international majors. Private sources suggest Saudi Arabia is unhappy with the quota compliance efforts of several OPEC colleagues."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "We believe the potential for global oil demand to be even lower than the most bearish of current forecasts. We expect this will prompt OPEC into further action at some point in 2009. However, we are reassured by the ongoing flattening in the crude oil curve, which we expect will help lift oil prices into the second quarter."

When OPEC ministers meet Mar. 15 in Vienna, KBC analysts said, "They want to be able to demonstrate that quota compliance has reached as high as it will get (i.e. about 90%). On this basis, it might then be possible to announce a further quota cut of 1 million b/d in an effort to move prices sustainably above $50/bbl in the short term with the prospect of hitting $75/bbl by yearend on the assumption that the market tightens. To this end, there are indications that Saudi Arabia might be willing to cut by a further 300,000 b/d with the other countries contributing 700,000 b/d between them. Such a cut could be necessary ahead of the seasonal slump in demand as winter ends and as refiners go into a maintenance season. Indeed, some press reports suggest that Saudi Arabia has already cut output below its quota . . ."

KBC analysts said, "OPEC needs to increase its income without inflicting further economic damage on a weakening global economy." But the push for higher oil prices is not limited to the national oil companies. KBC analysts reported, "This week BP [PLC] told us that in order to maintain its dividend to shareholders and to fund its $20 billion capital expenditure budget without recourse to borrowing, an oil price of $60/bbl is required."

They said, "Many of the major oil companies, ExxonMobil [Corp.] being the most
prominent, are striving to maintain capital investment, and it is important that they do so because demand will eventually recover and more investment is required, particularly in the upstream, for which the lead times are often longer than downstream. Total told us a few months ago that $90/bbl was needed to generate a 12.5% internal rate of return for their Canadian tar sands projects and $75/bbl for their offshore West African projects."

Natural gas
Raymond James analysts reiterated, "Gas is going to be ugly, and NGL production levels aren't winning any pageants either. Due to declining refinery utilization and weak industrial-consumer demand for NGL feedstocks, NGL margins have remained depressed, and average NGL production levels are down 600 MMcfd on a year-over-year basis since the beginning of withdrawal season."

Raymond James analysts expect that improved processing margins during the second half of this year could increase production, "thereby narrowing the year-over-year gas supply level from current levels of 600 MMcfd to 300 MMcfd looser." They said, "From a demand perspective, we believe refinery and industrial demand will continue to trend lower, thereby reducing NGL production by an additional 200 MMcfd. Taken together, we are estimating that NGL production levels will be at least 500 MMcfd less (looser) on a year-over-year basis (Nov. 1 to Oct. 31)."

FBR analysts noted, "Improved technology and methodology are making a large quantity of low-cost shale gas economical. Lower demand and excess capacity are also lowering service costs. This should lower the weighted-average marginal cost of production 20% in 2009 to below $3[/bbl]. Even with more than a 60% reduction in gas capex, the natural gas market will not be balanced, in our opinion. There could need to be another 25–30% drop in gas capex in 2010 to balance the market. The 2008 capex level is unlikely to be seen for many years."

According to FBR analysts, 1,000 US land rigs need to be retired. "We expect the natural gas rig count to average 882 rigs in 2009 and 782 in 2010 as capex is cut to balance the natural gas market. In 2011, we expect the US land rig count to average 1,220. With more than 2,500 rigs marketed at the peak of the 2008 cycle, including 750 new builds and not including 100 under construction new builds, we believe 1,000 rigs need be stacked for land rig margins to rise above cash costs. Utilization for 2009 and 2010 should be around 40% and 74% long term after 1,000 rigs are stacked," they said.

"Over the last several months, the market has declined at an increasingly rapid pace for both jack ups and deepwater [rigs]. Tender activity has dried up considerably," said FBR analysts. "We expect deepwater day rates to fall on average by 42% from peak rates while we expect jack up day rates to fall on average by 53% from peak rates.

Energy prices
The April contract for benchmark US light, sweet crudes rebounded $1.91 to $45.52/bbl Mar. 6 on the New York Mercantile Exchange. Benchmark US crude now is trading at a $1/bbl premium to North Sea Brent crude for the first time since Jan. 1, said analysts with Pritchard Capital Partners LLC, New Orleans.

The May crude contract gained $2.06 to $47.72/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.91 to $45.52/bbl. Heating oil for April escalated 6.96¢ to $1.23/gal on NYMEX. The April contract for reformulated blend stock for oxygenate blending (RBOB) increased $1.95¢ to $1.33/gal.

Natural gas for the same month, however, continued to fall, down 14.3¢ to $3.95/MMbtu on NYMEX. That was "the first time prices closed below key $4/Mcf support this cycle," said Pritchard Capital Partners. They said, "The basic issue remains—US production is still 3 bcfd above a year ago, while demand appears to be down 2 bcfd in face of higher LNG imports expected heading this way throughout the year."

On the US spot market, gas at Henry Hub, La., dropped 29¢ to $3.95/MMbtu, the same finish as the front-month futures contract.

In London, the April IPE contract for North Sea Brent crude advanced $1.21 to $44.85/bbl. Gas oil for March continued its decline, however, down $1.25 to $364.75/tonne.

The average price for OPEC's basket of 12 reference crudes dropped 72¢ to $43.15/bbl on Mar. 6. So far this year, OPEC's basket price has averaged $41.62/bbl.

Contact Sam Fletcher at [email protected]