MARKET WATCH: Crude, gas prices fall

Front-month contracts for crude and natural gas hit new near-term lows in both intraday trading and closing prices Jan. 15 on the New York market amid more indications of economic malaise threatening to curtail energy demand.

Jan 16th, 2009

Sam Fletcher
Senior Writer

HOUSTON, Jan. 16 -- Front-month contracts for crude and natural gas hit new near-term lows in both intraday trading and closing prices Jan. 15 on the New York market amid more indications of economic malaise threatening to curtail energy demand.

"A technical breakdown sent front-month crude oil futures tumbling more than $4/bbl [Jan. 15], but by session-end the contract had recovered roughly half its losses," said analysts at Pritchard Capital Partners LLC, New Orleans. They reported the biggest trading volume was for the March crude contract that will move to the front-month position next week.

"Despite the commodity weakness, energy stocks are trading at least 10% above the October lows seen last year," said Pritchard Capital analysts. "Is this an indication that commodity weakness is already reflected in energy company share prices?"

In other news, the Organization of Petroleum Exporting Countries forecast world demand for oil will fall for a second consecutive year in 2009. Meanwhile, the US Department of Labor reported first-time applications for unemployment benefits in the US increased by 54,000 last week.

DOL also reported that a record plunge in gasoline prices dropped total consumer prices by 0.7% in December, slightly less than the 0.9% economists expected. Consumer prices inched up by just 0.1% in 2008, the smallest annual change since 1954 when prices dropped 0.7%. The 2008 price increase was down from a 4.1% hike in 2007 primarily because of lower energy prices in recent months.

WTI vs. Brent
In the Houston office of Raymond James & Associates Inc., analysts reported, "The big story over the past few days is the price disparity that has developed between West Texas Intermediate [the benchmark US crude traded on the New York Mercantile Exchange] and [North Sea] Brent crude. While WTI is reflective of the price of oil in Cushing, Okla., Brent crude is more reflective of the international price of oil since it is used to price two thirds of the world's internationally traded oil."

Historically, these two crudes of similar composition have traded around the same pricing levels. "But as inventories in Cushing near [storage] capacity, the price of WTI is $12 lower than that of Brent," said Raymond James analysts. Because of minimal storage capacity at the Cushing delivery point, physical traders are selling WTI positions ahead of the contract expiration to avoid delivery. "With inventories at record highs, oil tankers sitting idle at sea hoarding oil, and total US petroleum demand down 7% compared with last year, the price disparity between WTI and Brent could linger for months," analysts said.

Paul Horsnell at Barclays Capital Inc., London, said although 18.1 million bbl of crude have poured into Cushing over the last 3 months, supplies at other US storage points are 40 million bbl lower than in mid-2007 (OGJ Online, Jan. 15, 2009).

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "WTI is the most traded crude oil contract, but it would be wrong to extrapolate a Cushing supply and demand as the world's supply and demand. It does not feel that way when so much attention is paid to the prompt WTI contract, but the other reality is that, in all the doom and gloom, [the March] Brent [contract price] is unchanged on the week." However, he predicted, "Technically, the February WTI contract will remain out of control as we approach expiry [on Jan. 22] with a 1-day holiday [Martin Luther King Day on Jan. 19] in between.

IEA outlook
In its latest monthly report Jan. 16, the International Energy Agency in Paris again reduced its outlook for global oil demand for both 2008 and 2009. IEA reduced its 2009 forecast by 1 million b/d to 85.3 million b/d, down 0.6% from 2008 levels. Its 2008 forecast was reduced by 70,000 b/d to 85.8 million b/d, down 0.3% from 2007 levels. That would be the first 2-year total contraction in global oil demand since 1982-83.

"Global oil supply was flat in December at 86.2 million b/d, with curbed OPEC output offset by gains elsewhere," said IEA officials. They estimated non-OPEC supply at 49.5 million b/d in 2008 and 50 million b/d in 2009, down 60,000 b/d and 30,000 b/d, respectively, from the previous monthly report.

IEA said, "Crude oil prices rose to nearly $50/bbl in early January, supported by cold weather, the Russian-Ukrainian gas crisis, and fighting in Gaza. Subsequently, weak global refinery demand and an increasing crude overhang have pressured Brent futures to currently around $45/bbl, while WTI was at $35/bbl, distorted by record-high Cushing stocks."

Energy prices
The February contract for benchmark US light, sweet crudes traded as low as $33.20/bbl Jan. 15 on NYMEX—"just 80¢/bbl higher than the multiyear low set 4 weeks ago," said Pritchard Capital analysts—before recovering to close at $35.40/bbl, the lowest finish in a month and down $1.88 for the day. The March contract lost 65¢ to $43.54/bbl. On the US spot market, WTI at Cushing was down $1.88 to $35.40/bbl. Heating oil for February delivery increased 2.4¢ to $1.49 gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.65¢ but its closing price was virtually unchanged at $1.17/gal.

The February natural gas contract dropped 12.7¢ to a contract low of $4.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 15¢ to $5.27/MMbtu. Natural gas was driven lower by a smaller than expected draw of 94 bcf from US underground storage in the week ended Jan. 9 (OGJ Online, Jan. 15, 2009).

Pritchard Capital analysts said, "With over 200 [gas] wells drilled and not yet placed on line in the Barnett shale, it will be some time before production declines are visible. A difficult environment is seen for natural gas over the next 6 months as demand remains weak, net imports are likely flat at best, and supplies are trending up due to strong results from horizontal drilling."

Raymond James analysts also are bearish about gas. "It's ugly out there, and it's hard to see anything that would justify a sustained rally from current levels," they said.

In London, the February IPE contract for North Sea Brent crude dropped 39¢ to $44.69/bbl. The February contract for gas oil gained 25¢ to $457.75/tonne.

The average price for OPEC's basket of 12 reference crudes lost 46¢ to $40.85/bbl on Jan. 15.

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