MARKET WATCH: February expiration raises crude price

The price for February benchmark US crude hit a 2-week high Jan. 20 on the New York market as traders scrambled to cover short positions on that contract, which expired at the end of that session.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 21 -- The price for February benchmark US crude hit a 2-week high Jan. 20 on the New York market as traders scrambled to cover short positions on that contract, which expired at the end of that session.

The new front-month March contract was the most heavily traded in a tighter range, but the price for it and subsequent monthly contracts continued to fall.

Crude markets are still in contango with the price of each subsequent monthly contract higher than the one before through at least February 2010. In the Houston office of Raymond James & Associates Inc., analysts advised, "Expect this steep contango to continue, as inventories at Cushing, Okla., [delivery point for the gas futures and spot markets] are almost full."

However, Olivier Jakob at Petromatrix, Zug, Switzerland, said the contango between the January and February crude contracts widened by $5.96/bbl from Dec. 15 through expiration of the January contract, while the February-March contango narrowed by $6.04/bbl between Jan. 15 and the Jan. 20 expiration of the February contract.

"The only hard conclusion that we draw is that maybe apart from the handful of companies that have storage in Cushing, the West Texas Intermediate expiries have become more a lottery than a trade, and wisdom calls for positions to be rolled at least a week before expiry and preferably before the start of the month," Jakob said.

Meanwhile, both the euro and the British pound declined in value against the US dollar, with the pound hitting a 7½-year low following a Jan. 19 announcement of another banking-sector bailout by the UK government. The financial crisis has sparked talk of the possible nationalization of UK banks. In other news, gold prices rose sharply as investors sought a safe haven for their money.

"Global markets are still trying to force the banking sector out of the private economy and back into being a public service, but that transition will be painful and is leading to a renewed increase in the Chicago Board of Exchange's volatility index," Jakob said.

In New Orleans, analysts at Pritchard Capital Partners LLC, New Orleans, said the fourth quarter earnings report "season" began Jan. 21. Schlumberger Ltd.'s report scheduled Jan. 23 should be the "oil service bellwether that sets the tone for the group," analysts said. "We believe Schlumberger's call will have a cautious tone and point out 2009 headwinds, including potential cutbacks in exploratory spending, national oil company pricing pressures, and offshore rig delivery delays," they said.

Corporate stocks for the oil service sector "are still priced to reflect a long and sustained recessionary environment through 2009 and possibly into 2010," the analysts said. "It appears that rig count forecasts are now gravitating to what used to be considered the worst-case scenario, down 35-40%, or 700-1,000 rigs," they said.

The Department of Energy's weekly petroleum status report, usually released before noon on Wednesdays, has been delayed until Jan. 22 due to the Martin Luther King Jr. holiday and the presidential inauguration this week.

Energy prices
The expiring February contract for benchmark US light, sweet crudes traded at $32.70-38.55/bbl Jan. 20, before closing at $38.74/bbl, up $2.23 for the day on the New York Mercantile Exchange. The new front-month March contract lost $1.73 to $40.84/bbl. On the US spot market, WTI at Cushing was up $2.23 to $38.74/bbl. Heating oil for February delivery dropped 9.76¢ to $1.38/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) declined 2.41¢ to $1.14/gal.

Natural gas for the same month dropped 15.9¢ to $4.64/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 24.5¢ to $4.85/MMbtu. Pritchard Capital Partners blamed weakening demand for gas by industrial users, following a recent Department of Energy forecast that US industrial demand will decline by 3% in 2009. Industrial demand was down 2 bcfd from year-ago levels in December, analysts said.

In London, the March IPE contract for North Sea Brent crude lost 88¢ to $43.62/bbl. February gas oil gained $9.50 to $447/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped 96¢ to $39.34/bbl on Jan. 20.

Contact Sam Fletcher at samf@ogjonline.com.

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