MARKET WATCH: Gas price rises as crude falls

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 14 -- Natural gas touched a 6-year low in intraday trading before clawing back to an increase Apr. 13 on the New York market, but crude lost most of its pre-Easter gain after the Paris-based International Energy Agency reduced its world oil demand projection by 1 million b/d to 83.4 million b/d—the lowest level in 5 years.

It marked the eighth consecutive month IEA has reduced its original estimate of the 2009 world market for crude, now predicted to be 2.4 million b/d below the 2008 level (OGJ Online, Apr. 13, 2009). Both crude and gas prices were up slightly in early trading Apr. 14 in New York.

On Apr. 13, the dollar index lost all of its gains from the previous week, "but that together with a stock market holding ground was not sufficient to support crude oil," said Olivier Jakob at Petromatrix, Zug, Switzerland. Although the front-month benchmark US crude contract lost most of its gains from Apr. 9, it "managed to hold the support of $50/bbl," he noted. "The range is still $45-55/bbl on the continuous chart with the weight of [supply and demand] fundamentals providing resistance above $55/bbl while bottoming equities will be providing support around $45/bbl." With the May contract, "starting to lose liquidity," Jakob said, "the focus will increasingly be on the capacity of the June contract to hold on to the $50/bbl support." The May contract for North Sea Brent expires at the end of trade Apr. 15 "and has been stopped right on the $54/bbl resistance," he said.

The Centre for Global Energy Studies (CGES), London, reported Apr. 14, "The immediate outlook for global oil demand remains weak. Oil prices have fallen by almost $100/bbl from their peak level last year and are struggling to remain above $50/bbl. At the moment there seems to be no end to the gloom, but the current economic woes will abate and in due course oil demand growth will return, albeit probably at a lower trend rate than before the current crisis."

In New Orleans, analysts at Pritchard Capital Partners LLC speculated, "The May-June West Texas Intermediate contango trading spread has widened out to $3/bbl and may spur increases in the storage arbitrage trade. China's massive $585 billion government stimulus program appears to be kicking in as demand for raw materials is showing signs of recovery, with crude oil imports hitting a 1-year high in March."

In the natural gas market, Pritchard Capital Partners said they're "beginning to see utilities and storage operators locking up contracts at favorable prices to build up supplies for use next winter." Lower gas prices could reverse a 2-month trend of declining weather-adjusted demand from residential and commercial users, they said.

Meanwhile, Pritchard Capital analysts said, "The worst may be priced into the natural gas-focused exploration and production stocks as natural gas finds a floor." They said, "We see a likely second quarter earnings per share trough, a second quarter rig count trough, and a US production decline response visible in third quarter (July or August). Barnett shale production is already in decline (rig drop from 177 to 77 since the third quarter of 2008) [and] Rockies production declines are out 1-2 months."

They concluded, "The risk is how long you trade along the bottom before US demand returns in response to low prices. Our analysis of winter storage draws indicates that markets were roughly 2.7-3.2 bcfd oversupplied relative to the past 10 years based on the relationship between heating degree days (population weighted) and reported draws."

In other news, analysts in the Houston office of Raymond James & Associates Inc. noted some coal mines are being shut down temporarily because of soft demand.

Middle East outlook
The Organization of Petroleum Exporting Countries further reduced crude production in March, "although Iran and Venezuela remain far from their quotas," said CGES analysts. "Despite rising spare capacity now, the world will need more oil-production capacity in the longer term."

However, producers' claims higher oil prices are necessary to expand capacity for the future only "reflect their fiscal needs, not upstream investment costs," CGES reported.

"The problem is not that investment in new capacity in the OPEC countries would be unprofitable—the cost of developing new oil-production capacity in the Middle East is not more than $10/bbl—but that the economies of the oil-producing countries remain so dependant upon oil revenues that, for many of them, there is little or no money left to invest in new capacity after meeting the costs of running the country when oil prices are at $50/bbl," they said. "In a recent economic commentary, the Arab Petroleum Investments Corp. concluded that a fair price for oil 'lies at the confluence of oil companies' investment options and oil-producing countries' fiscal needs', implying that it has little or nothing to do with the actual cost of extracting conventional oil in the high reserves countries."

CGES analysts claim, "Once oil companies have secured more reasonable prices from service providers, they will be able to invest profitably at the current level of prices, even if they expect them to persist. Oil-producing countries, for their part, ignore their own long-term interest in investing to maintain adequate oil-production capacity at their peril."

Meanwhile, Saudi Arabia's nominations for crude exports in May "are a mixed bag," said Jakob. "Some consumers are reporting slightly lower nomination, others (and in the US) no change. There will be a school of thought driven by the idea that the sharp reduction of the demand forecast by the IEA and perhaps more importantly the rise in stocks and days of stock cover will lead OPEC to implement further cuts at the next end-of-May meeting."

However, he said, "Improved compliance [among OPEC members with their official production quotas] is still to be proven, and there are a few geopolitical considerations that does not allow us to already jump to the conclusion that Saudi Arabia will take on its shoulder a leading role in additional cuts."

Jakob pointed out, "Some major and very significant progress has been made over the weekend towards direct discussions between the US and Iran over the nuclear issues. According to the New York Times, the US administration is now ready to drop the request that Iran shuts down its centrifuges before discussions can begin. It seems that the 'preconditions' are being dropped, and Iran has signaled that it is now ready to engage with the US."

As a result, Jakob said, "Saudi Arabia now has to watch for Iran gaining even more strength in its role of regional power, this as a time when the US is also starting to bring the boys home from Iraq. Saudi Arabia is also now part of the [Group of 20 developing nations concerned about international trade]. Now "knowing the change of cards in the US-Iran game," Saudi Arabia "might want to maintain its political influence through that body," Jakob suggested. "An additional OPEC cut will rely mostly on Saudi Arabia, and it might not have much to gain politically from it while the impact on prices of a further cut will remain questionable as long as some OPEC members (Iran, Venezuela, Nigeria, Angola…) do not respect their quota allocations. OPEC needs a revival of demand; the first quarter has proven that the supply side is not enough to stop the building of stocks."

Energy prices
The May contract for benchmark US sweet, light crudes dropped $2.19 to $50.05/bbl on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was down the same amount to the same price. The June crude contract lost $1.71 to $52.98/bbl on NYMEX. Heating oil for May delivery fell 3.08¢ to $1.40/gal. The May contract for reformulated blend stock for oxygenate blending (RBOB) was down 1.78¢ to $1.46/gal.

Natural gas for the same month traded as low as $3.50/MMbtu Apr. 13, its lowest level on NYMEX since September 2002, but closed up 1.8¢ to $3.63/MMbtu. On the US spot market, gas at Henry Hub, La., dropped 10¢ to $3.47/MMbtu.

In London, the May IPE contract for North Sea Brent crude declined $1.92 to $52.14/bbl. The May gas oil contract fell $16.75 to $436/tonne.

The average price for OPEC's basket of 12 reference crudes lost 34¢ to $51.92/bbl on Apr. 13. So far this year, OPEC's basket price has averaged $43.85/bbl.

Contact Sam Fletcher at samf@ogjonline.com.