MARKET WATCH: Crude prices continue downward spiral

Crude prices fell for the fifth consecutive session on the New York futures market, down 8% on Jan. 12 in the face of surplus supplies and fears of a sharp drop in demand this year.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 13 -- Crude prices fell for the fifth consecutive session on the New York futures market, down 8% on Jan. 12 in the face of surplus supplies and fears of a sharp drop in demand this year.

It was "a commodity meltdown day," with West Texas Intermediate in "a Cushing[, Okla.] freefall," said Olivier Jakob at Petromatrix, Zug, Switzerland. However, he said, "Apart from the prompt contract, energy commodities were holding relatively better than their counterparts in other commodity sectors."

Oil inventories at the Cushing delivery hub are at the highest level since early 2004, while crude futures prices remain in contango, with each subsequent monthly contract exceeding the previous contract, climbing to $58/bbl for January 2010.

"The extreme WTI prompt contango is providing the US refineries that are lucky enough to be WTI-related with the best prompt processing margins since the end of the third quarter," said Jakob. "The collapse of WTI is not followed to the same extent by [North Sea] Brent [crude], and this is making for a further extreme widening of the Brent premium to WTI. Since the US still needs to import gasoline from Europe, the US gasoline crack has to increase to compensate for the losing value of US crude vs. European crude."

Meanwhile, Abdalla Salem El-Badri, secretary general of the Organization of Petroleum Exporting Countries, said Jan. 13 it is still too early to assess how that group's production cutbacks will affect crude markets. He claimed "almost 100% compliance" by OPEC members with the first two cuts of 500,000 b/d in September and 1.5 million b/d in October. "I hope that, come Feb. 15, compliance with the 2.2 million b/d cut (approved by OPEC members in December) will also be seen to have been at a high percentage," said El-Badri. If excess crude supplies are still undercutting oil prices at that point, OPEC "will not hesitate to take further measures to balance the market," he said.

"Very low prices will affect investments in both the upstream and downstream," said El-Badri. "This will have two main consequences. First, it will delay future investments in the sector, and second, it may also lead to the cancellation of further future investments. Either way, this will automatically affect oil supply to the market. In addition, it will also have an effect on gas supply."

Energy prices
The February contract for benchmark US sweet, light crudes dropped $3.24 to $37.59/bbl Jan. 12 on the New York Mercantile Exchange. The March contract lost $2.42 to $43.65/bbl. On the US spot market, WTI at Cushing was down $3.24 to $37.59/bbl. Heating oil for February delivery decreased 1.53¢ to $1.47/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) declined 2.71¢ to $1.08/gal.

Natural gas for the same month gained 2.6¢ to $5.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.5¢ to $5.60/MMbtu.

In London, the February IPE contract for North Sea Brent crude lost $1.51 to $42.91/bbl. Gas oil for January was unchanged at $454.75/tonne.

The average price for OPEC's basket of 12 reference crudes dropped $1.67 to $40.24/bbl Jan. 12.

Contact Sam Fletcher at samf@ogjonline.com.

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