MARKET WATCH: Crude price retreats in electronic trading

The February contract for benchmark sweet, light crudes fell as low as $33.89/bbl in after-hours electronic trading Jan. 19 before finishing at $34.08/bbl.

Sam Fletcher
Senior Writer

HOUSTON, Jan 20 -- The February contract for benchmark sweet, light crudes fell as low as $33.89/bbl in after-hours electronic trading Jan. 19 before finishing at $34.08/bbl, down $2.45 from the Jan. 16 closing on the New York Mercantile Exchange.

Floor trading was closed on NYMEX because of the US holiday honoring civil rights leader Martin Luther King Jr. Analysts at Pritchard Capital Partners LLC, New Orleans, said the price weakness in electronic trading resulted from "sharply lower European prices following news of potential resolution of the Russian-Ukraine gas dispute, as well as (2.5%) losses in European stock exchanges." They said, "The contango price trend on the NYMEX crude futures market has widened in the past few weeks, encouraging more players to take up a long position now and bet on a market rebound later this year, possibly in summer." Meanwhile, they said, "The estimated volume of crude oil stored on ships has shot up to as much as 100 million bbl on 50 [very large crude carriers], double the volume seen in early January and the highest in 25 years."

Price projections
Analysts in Goldman Sachs Group Inc.'s London office said plunging demand for oil should reduce oil prices to $30/bbl in the first quarter of 2009, followed by a "swift and violent rebound" to $65/bbl by the end of the year, with prices averaging out at $45/bbl for all of 2009. They see prices rising to $70/bbl in 2010 and $105/bbl by 2012.

Early last year, Goldman Sachs predicted crude prices would hit $150-200/bbl within 2 years. That call didn't pan out. Yet in another report late last year as prices tumbled, Goldman Sachs analysts said, "We do not believe oil markets are on-track for a decade-plus period of weakness like seen in the 1980s and 1990s."

Over the weekend, Algerian Energy and Mines Minister Chakib Khelil said the Organization of Petroleum Exporting Countries may agree on another production cut at its Mar. 15 meeting in Vienna if prices continue to spiral down. Oil prices peaked in July at $147/bbl and have since plummeted as a global economic crisis has undercut demand.

Pritchard Capital reported the 11 OPEC members other than Iraq have sliced production by 85% of the agreed reduction. "The worst performance is by Algeria, which has not cut production at all yet. Iran's Oil Ministry sees 2009 crude prices around $40/bbl, despite OPEC's agreement to cut total production by 4.2 million b/d, or 5% of global oil supply. He also believes further cuts will be needed to bring balance to the oil markets. Venezuela's oil minister would support additional OPEC output cuts, but sees a need to first stabilize the market and avoid a cycle of disinvestment," the analysts said. They said Venezuela needs a $70/bbl oil price to sustain investment and avoid shortages.

The average price OPEC's basket of 12 benchmark crudes lost $1.64 to $40.53/bbl on Jan. 19.

Recent conversations with executives of exploration and production companies indicate major capital program retrenchments are coming, said Pritchard Capital analysts. "Investors are hoping to hear one or two of the larger companies talk about [reducing] North American natural gas production in 2009 as a potential catalyst." The analysts said paying down debt and repurchasing corporate shares "look like a far more accretive use of capital for the E&P industry at this point."

In Houston, analysts at Raymond James & Associates Inc. warned, "Given the oil and gas price meltdown in 2008, investors should brace themselves for a large volume of reserve write-downs by E&P companies this earnings season." Companies with highest risk of write-downs "have some combination of the following characteristics," they said:

-- Long-lived reserves.

-- High operating cost structure.

-- A high [proved undeveloped] component to their reserve mix.

"Because oil had a much steeper price decline in 2008 than gas, oil-weighted producers are, in general, more at risk," said Raymond James analysts. "The good news is that, starting at the end of 2009, new SEC rules on reserve reporting will end the requirement—widely disliked in the industry—of using Dec. 31 pricing when calculating proved reserves. While we want to clearly acknowledge the 'headline risk' to E&P share prices from the near-term bearish news flow regarding reserves, these announcements have limited significance from a longer-term perspective."

Olivier Jakob at Petromatrix, Zug, Switzerland, reported Jan. 20, "Russian Gas is expected to flow back towards Europe later today, and the weather patterns are showing Europe to remain seasonally mild for the next 2 weeks." In the US, weather patterns indicate Northeast temperatures will be normal or below until the end of January, with a warmer outlook for the start of February.

"While the middle-distillate complex is still hurt by high stocks, relative poor demand, and high refinery yields, the light ends continue to regain strength, led by the pick up of naphtha demand in the Far-East. Expectations had been built that the recent Asian naphtha demand was short covering in front of the Chinese New Year celebrations [that start Jan. 26], but the enquiries for now are continuing. The relative strength in naphtha is then providing support to gasoline through the reforming economics," Jakob said.

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