MARKET WATCH: Crude rally reaches for 3-week high

Oil prices continued to rally Jan. 23 to the highest level in nearly 3 weeks, driven by a rise in heating oil and indications that production cuts by OPEC may be catching up with declines in demand.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 26 -- Crude prices continued to rally Jan. 23 to the highest level in nearly 3 weeks, driven by a rise in heating oil and indications that production cuts by the Organization of Petroleum Exporting Countries may be catching up with declines in demand.

The rally in crude closings "along with a significant crude price spread narrowing has brought some of the first bullish commentary on crude heard in quite some time," observed analysts with Pritchard Capital Partners LLC, New Orleans. "The forward curve has flattened significantly over the last week, as the prompt month 12-month strip contango has narrowed from $27/bbl to $11/bbl—a clear signal that OPEC production cuts are having an impact on the crude oil market."

Analysts in the Houston office of Raymond James & Associates Inc. reported crude prices were "bouncing around" in early trading Jan. 26, as optimism that OPEC "will implement production cuts this month wrestle against bearish economic data points expected this week." OPEC generally is expected to reduce production by 5% to 26.2 million b/d in January, down from 27.4 million b/d in December but still above its official quota of 24.8 million b/d.

Nevertheless, there is a "surprisingly high level of compliance" with assigned quotas among OPEC members, said Raymond James analysts. "Until this latest round of cuts, OPEC's overall excess capacity had been near 30-year lows, most likely less than 2 million b/d (under 3% of global demand). It is clearly higher than that today, as the cuts are taking effect, but eventually, when global oil demand begins to turn positive again (and we admit that we simply do not know when that will be), OPEC will begin to bump up against capacity limits yet again," they said.

Raymond James analysts noted non-OPEC oil production was stagnant even before producers' recent reductions of capital budgets. "It does not appear feasible that non-OPEC countries as a group will be able to deliver meaningful oil supply growth in the future," they concluded. "Indeed, a permanent non-OPEC peak seems likely within the next 3-5 years."

They said, "Non-OPEC growth has historically been highly dependent on Russian growth and, given its current policy environment, Russia's production looks set to continue (or even accelerate) its recent declines for years to come. Given that we project a decline in global oil demand in 2009, this issue may not be immediately pressing, but over the long run—when macroeconomic fundamentals improve and oil demand resumes its growth—the world's excess capacity 'cushion' is likely to revert to its wafer-thin levels of the past few years."

Meanwhile, Raymond James said, "Over the weekend, the International Monetary Fund announced plans of once again cutting its 2009 global growth forecast from 2.2% to 1-1.5%. This week, numerous US companies will release earnings reports and the Federal Reserve will hold a monetary policy meeting [Jan. 28-29]. The most significant data point on the economy will come [Jan. 30], when the government will announce its reading on the gross domestic product during the fourth quarter of 2008. Although expectations are relatively grim, lower-than-expected results could cause significant short-term movements in the market."

In other news, the Federal Highway Administration reported total US motorist mileage was down 3.7% for all of 2008 (OGJ Online, Jan. 23, 2009). "The figure slightly exceeds private and government estimates of gasoline demand contraction for last year," said Pritchard Capital analysts. "The Energy Information Administration estimates [a decline of] 3.3%, while MasterCard SpendingPulse estimates 3.2%. The EIA recently forecast that 2009 gasoline demand would decline by 1% or 100,000 b/d to 8.89 million b/d."

Energy prices
The March contract for benchmark US light, sweet crudes escalated by $2.80 to $46.47/bbl Jan. 23 on the New York Mercantile Exchange. The April contract gained $3.38 to $49.21/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.20 to $45.47/bbl. Heating oil for February climbed 10.19¢ to $1.45/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) increased 6.1¢ to $1.15/gal.

Natural gas for the same month dropped 16.3¢ to $4.52/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., was up 4¢ to $4.75/MMbtu.

EIA reported the withdrawal of 176 bcf of natural gas from US underground storage in the week ended Jan. 16. That reduced total US storage to 2.56 tcf, down 30 bcf from year-ago levels but 31 bcf above the 5-year average.

Pritchard Capital analysts said, "We estimate [gas] demand is 2 bcfd below a year ago, principally due to lower industrial demand, while supplies are up 3-4 bcfd due to higher production in the Midcontinent shale plays, the Barnett and Fayetteville, as well as 500 MMcfd of growth in Wyoming production year over year. End of January storage levels will likely be 75 bcf above year-ago levels, and we are forecasting end-March storage should at 1.7 tcf, well above the 5-yr average of 1.35 tcf."

In London, the March IPE contract for North Sea Brent crude gained $2.98 to $48.37/bbl. February gas oil lost $4 to $416.75/tonne.

The average price for OPEC's basket of 12 reference crudes increased 60¢ to $40.91/bbl on Jan. 23. So far this year, OPEC's basket price has averaged $41.55/bbl, down sharply from an average $94.45/bbl for all of 2008.

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