MARKET WATCH: Energy prices slip lower in market adjustment

Energy prices fell Feb. 20 as markets readjusted from the biggest 1-day gain this year in oil prices during the previous trading session.

Feb 23rd, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 23 -- Energy prices fell Feb. 20 as markets readjusted from the biggest 1-day gain this year in oil prices during the previous trading session.

"Crude oil is trading higher this morning on the heels of what appears to be a higher open for the broader markets," said analysts Feb. 23 in the Houston office of Raymond James & Associates Inc. "The positive sentiment stems from news that the US government may increase its ownership stake in Citigroup [Inc., New York]." Traders also were encouraged by Algerian Energy and Mines Minister Chakib Khelil's statement over the weekend that the Organization of Petroleum Exporting Countries will again reduce production at its scheduled Mar. 15 meeting.

Raymond James analysts predicted "a high level of volatility will persist in commodity prices" as global economic problems continue to undercut demand, "which has dropped steeper and faster than supply has been removed." They said, "The unstable markets are a result of crude searching for a price where sufficient demand comes off the sidelines and absorbs enough supply to produce a true equilibrium price. Since we are uncertain on the timing of a global recovery that will ultimately translate into a rebounding level of gross domestic product on a worldwide basis, we believe that the existing, steep contango market will perpetuate as the front end of the curve is depressed by a lack of industrialized growth and an unknown amount of excess crude hovering over the market."

Analysts at the Centre for Global Energy Studies (CGES), London, have a different viewpoint, however. "Although global oil demand has fallen rapidly, OPEC supply fell even faster in recent months, removing the oversupply that emerged in the second half of 2008," they said. "It is still unclear, though, whether the organization has actually turned lifters away, or simply let its production follow…falling demand from its customers."

Reduction of Saudi Arabia's crude production is nearing the limit imposed by the Kingdom's need for associated gas. Meanwhile, CGES analysts said, "Several other members have yet to make any significant cuts in their own production. By January, OPEC had implemented some 2.3 million b/d of its agreed 4.2 million b/d cut, with further reductions expected in February and March. Implementing the cuts in full could tighten the market, but any price recovery would likely be short-lived, triggering a further weakening of demand, at least until the global economy begins to pick up again."

As oil prices slipped lower Feb. 20, gold continued rallying to a 7-month high above $1,000/oz, approaching record levels of last April. Investment in gold as a safe haven indicates investors are worried about the economy. CGES analysts observed, "The outlook for the global economy seems to worsen with every new forecast, yet the price of oil has stabilized, at least for now, with [North Sea] Brent around $40/bbl since mid-November."

CGES said it will be "almost impossible" for OPEC to raise oil prices "anywhere near its desired level of $75/bbl" in this economic climate. "It may be that the best it can do is to cut production in line with demand to prevent further falls in the oil price until the economy begins to recover," CGES analysts said.

Energy prices
The expiring March contract for benchmark US light, sweet crudes dropped 54¢ to $38.94/bbl Feb. 20 on the New York Mercantile Exchange. The new front-month April contract declined 15¢ to $40.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 54¢ to $38.94/bbl. Heating oil for March delivery slipped 0.78¢ to $1.19/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) lost 2.4¢ to $1.07/gal.

Natural gas for the same month traded as low as $3.92/MMbtu during the Feb. 20 session before closing at $4.01/MMbtu, down 7.2¢ for the day on NYMEX. On the US spot market, gas at Henry Hub, La., fell 23¢ to $4.19/MMbtu. A worst-than-expected draw of natural gas from US storage in the week ended Feb. 13 focused investors on the severity of a low-demand environment, "despite supply growth declines driven by 38% decline in the US rig count over the last 6 months," said analysts at Pritchard Capital Partners LLC, New Orleans (OGJ Online, Feb. 20, 2009).

In London, the April IPE contract for North Sea Brent crude declined 10¢ to $41.89/bbl. Gas oil for March fell $6.75 to $364/tonne.

The average price for OPEC's basket of 12 reference crudes gained 53¢ to $39.17/bbl on Feb. 20. So far this year, OPEC's basket price has averaged $41.50/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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