MARKET WATCH: Signs of supply cuts raise crude prices

Sam Fletcher
Senior Writer

HOUSTON, Jan. 22 -- The new front-month March contract for crude rallied above $43/bbl Jan. 21 on the New York market among hopeful signs that members of the Organization of Petroleum Exporting Countries are adhering to their pledge to reduce production by 4.2 million b/d from September output.

OPEC sources said Saudi Arabia plans to cut its production an additional 300,000 b/d below its current quota before the group's Mar. 15 meeting. "This shows that the Saudis believe it is imperative to match a lower demand with a lower supply," said analysts at Pritchard Capital Partners LLC, New Orleans. Excluding Iraq, which is still trying to raise its production to prewar levels, the other 11 OPEC members produced 27.4 million b/d in December, 2.6 million b/d above their combined quota ceiling. Meanwhile, Kuwait notified customers it is reducing oil exports.

Mexico's Petroleos Mexicanos announced its biggest production decline since World War II, down 9.2% to 2.8 million b/d in 2008 as output from its Cantarell oil field fell 31%. The field is Mexico's largest and the third largest in the world. Mexico is the third largest supplier of crude to the US after Canada and Saudi Arabia.

President Barack Obama's plans to complete an assistance program that can be paired with the $825 billion US economic stimulus package also supported the oil price rally, said Pritchard Capital analysts. In other financial news, the UK pound fell to a 23-year low against the dollar in intraday trading, down 13% from the intraday peak on Jan. 19.

In Washington, DC, the US House Ways and Means Committee is debating provisions of the $275 billion tax title associated the federal economic stimulus plan. "The most eye-catching (and therefore controversial) benefit within this bill may be its provision allocating to the Department of Energy responsibility for giving grants equivalent to 30% of up-front costs to wind and other Section 45 qualifying project sponsors as "prebates" within 60 days, rather than pro rata production tax credits (PTC) claimed over a 10-year period," said analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va.

That provision is "not a done deal and could still be revised downward or eliminated," the analysts said. "Even if it does pass into final law, we remain skeptical that it will 'unstick' stalled wind demand entirely, as 30% above the line is taxable and worth 19.5% at a 35% tax rate, or just about exactly the after-tax present value of the PTC over its 10-year life."

During Jan. 21 trading the broader markets, energy stocks, and commodities all moved higher, said analysts at Raymond James & Associates Inc., in Houston. "Unfortunately, we continue to believe that there is room for further downside in most energy stocks given our bearish outlook regarding natural gas prices. However, while we expect crude prices to be volatile in the short term, there are likely some bargains to be had in many oil-weighted stocks," they said.

US inventories
The Energy Information Administration said Jan. 22 commercial US crude inventories shot up 6.1 million bbl to 332.7 million bbl in the week ended Jan. 16. That's above average for this time of year and exceeds earlier expectations of a 1.5 million bbl increase. Gasoline stocks escalated by 6.5 million bbl to 220 million bbl in the same period; the Wall Street consensus was for a growth of 1.8 million bbl. Distillate fuel inventories increased by 800,000 bbl to 145 million bbl, also above average for this time of year. Analysts were expecting a decrease of 250,000 bbl. EIA earlier reported distillate fuel stocks had jumped by 6.4 million bbl in the week ended Jan. 9, but several analysts said such a spike was less likely than unannounced revisions by EIA of earlier tallies.

Imports of crude into the US increased by 137,000 b/d to 9.9 million b/d in the week ended Jan. 16. The input of crude into US refineries declined by 441,000 b/d to 14.1 million b/d, with units operating at 83.3% of capacity. Gasoline production fell to 8.7 million b/d, and distillate fuel production decreased to 4.2 million b/d.

Energy prices
The March contract for benchmark US sweet, light crudes gained $2.71 to $43.55/bbl Jan. 21 on the New York Mercantile Exchange. The April contract increased $1.30 to $45.55/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.51 to $42.03/bbl. Heating oil for February increased 1.02¢ to $1.39/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) advanced 3.07¢ to $1.17/gal.

Natural gas for the same month jumped by 13.8¢ to $4.78/MMbut on NYMEX. On the US spot market, gas at Henry Hub, La., was up 4.5¢ to $4.89/MMbtu. "[Gas] futures gained for the first time in 6 days amid forecasts of cold weather next week in the Midwest and Northeast," said Pritchard Capital analysts. "We believe the bad news for natural gas is largely discounted into [the price for corporate] stocks, although it will get worse for several months. Glaring consensus seems to be to favor oily [companies] names, which makes us think the smarter move is to be accumulating the gassy [firms]. Hedged, low cost names with solid balance sheets are likely to perform best in this environment," they advised.

Because of the holiday and inauguration early this week, EIA's report on US gas in underground storage will be delayed until Jan. 23. Meanwhile, its newly released electric power report for 2007 said net natural gas-fired power generation increased 9.8% from 2006 levels as the gas market's share of the overall power supply picture rose to 21.6%. Meanwhile, LNG imports could exacerbate the 4-5 bcfd of excess gas already in markets. That large overhang is "primarily due to success of horizontal drilling in new shale plays and weak demand from chemical, paper, mining, manufacturing, and refining sectors." said Pritchard Capital analysts.

In London, the March IPE contract for North Sea Brent crude increased $1.40 to $45.02/bbl. Gas oil for February, however, dropped $17.75 to $429.25/tonne, plowing under its $9.50 gain from the previous session.

The average price for OPEC's basket of 12 reference crudes gained 20¢ to $39.54/bbl on Jan. 21.

Contact Sam Fletcher at [email protected].