MARKET WATCH: Crude price slips lower, ending rally

Sam Fletcher
Senior Writer

HOUSTON, Jan. 27 -- The price of the front-month crude contract slipped lower Jan. 26, part of a late-day decline in commodities markets in New York.

"Oil advanced in earlier trading after a report the index of economic indicators gained for the first time in 6 months and the National Association of Realtors showed that sales of previously owned US homes unexpectedly climbed from a record low, spurring hopes for a stronger economy," said analysts at Pritchard Capital Partners LLC, New Orleans.

Natural gas prices continued to decline, "driven by a new 14-day weather forecast calling for milder weather next month," they said.

Although last week's oil rally lost steam, traders are still eyeing the psychologically important $50/bbl mark. "Technically, West Texas Intermediate is still facing a major test of resistance at $50/bbl, and it will take a combination of factors to break it," said Olivier Jakob at Petromatrix, Zug, Switzerland. Those factors might include a recovery in the Dow Jones industrial average, a decline in the value of the US dollar, and "some surprise draws" from US crude inventories.

The $50/bbl price "is an important technical resistance, and as we approach it there will be some profit taking from market participants trading the range," Jakob said. "This was evidenced by some profit taking yesterday."

Jakob said, "Gasoline was leading the show yesterday as we start to enter deeper into maintenance season for US refineries." During February, he said, the US Department of Energy expects to see 164,000 b/d of fluidized catalytic cracker maintenance in Petroleum Administration for Defense District 1 (PADD 1) on the East Coast, compared with an historical average of 30,000 b/d.

Meanwhile, production cuts by the Organization of Petroleum Exporting Countries "have tightened the market, and oil prices have stopped falling, at least for now," said the Centre for Global Energy Studies, London, in a Jan. 26 report. "The massive destocking that went on between the refinery gate and the final consumer appears to have reached its end, which should be reflected in a recovery in demand for oil from refineries. However, OPEC's attempts to push oil prices back up to $75/bbl and keep them there may be thwarted by the weakness of the global economy," said CGES analysts.

"Oil prices remain balanced between downward pressure from the weakening global economic outlook and upward pressure from OPEC oil supply cuts," CGES analysts reported. "Until the end of 2008, the economy had been winning, pushing oil prices down from the highs reached in early July, as OPEC seemed unable to rein in supply quickly enough. The balance may now have shifted, with steep production cuts implemented and further reductions to actual production on the way, according to OPEC oil ministers. The action taken so far appears to have been sufficient to bring a fragile stability to oil prices at around $45/bbl for [North Sea] Brent, but this is too low for comfort for many OPEC member-countries, which have quickly become used to the high revenues they enjoyed in 2008."

CGES estimates the 11 OPEC members bound by the group's quotas have cut production more than 2.3 million b/d from their September baseline. That's far short of the official target reduction of 4.2 million b/d. However, if OPEC cuts production by another 2 million b/d to reach that goal and push up oil prices, CGES said, "It would almost certainly have a serious negative impact on the global economy, which is already struggling to find a firm floor on which to build a recovery."

In other news, a cyclone off Western Australia has shut in 45% of that country's oil production. However, the storm is rapidly weakening, and some operators said they'll probably resume production Jan. 28.

Energy prices
The March contract for benchmark US sweet, light crudes traded at $45.25-48.59/bbl Jan. 26 before closing at $45.73/bbl, down 74¢ for the day on the New York Mercantile Exchange. The April contract lost 72¢ to $48.49/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 26¢ to $45.73/bbl. Heating oil for February declined by 2.35¢ to $1.43/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) dipped 0.13¢ with its closing price essentially unchanged at $1.15/gal.

Natural gas for the same month dropped 2.8¢ to $4.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 13¢to $4.62/MMbtu.

In London, the March IPE contract for North Sea Brent crude lost $1.41 to $46.96/bbl. Gas oil for February jumped by $39.25 to $456/tonne.

The average price for OPEC's basket of 12 reference crudes increased $1.62 to $42.53/bbl on Jan. 26.

Contact Sam Fletcher at [email protected].