MARKET WATCH Crude futures end 2005 above $61/bbl

Jan. 3, 2006
Energy prices continued to climb Dec. 30, the last trading day of 2005.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 3 -- Energy prices continued to climb Dec. 30, the last trading day of 2005, with the front-month crude contract closing above $61/bbl on the New York market, up 40% from price levels at the start of last year.

"The year 2005 marked the third consecutive year of outperformance for the energy sector," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "A robust global economic expansion created a favorable demand environment while supplies of both crude oil and natural gas remained generally tight, particularly following an unprecedented wave of disruptive hurricanes in the Gulf of Mexico."

Adkins said: "We believe that the first half of 2006 will be weaker than consensus while the second half will see energy prices higher than market expectations. Longer term, today's elevated commodity price levels should be broadly sustainable. On the oil front, we believe that [the Organization of Petroleum Exporting Countries] is prepared to (and will need to) defend a floor price near the $50 level in early 2006."

Adkins acknowledged a potentially "substantial upside" to Raymond James's current forecast for an average $58/bbl oil price in 2006 "if supply interruptions emerge." The firm expects gas prices to "average at approximately a 5.5:1 ratio with oil prices in 2006, as the weather-induced strength in late winter and hurricane-related tightness in the gas market spill over into 2006."

Hurricane damage
On Dec. 29, the US Minerals Management Service reported 103 offshore platforms inoperable in the Gulf of Mexico because of damage inflicted by Hurricane Katrina in late August and Hurricane Rita in late September. That represents 12.6% of the manned platforms on federal leases in the gulf.

Production still shut in as a result of those storms included 410,618 b/d of crude and 1.95 bcfd of natural gas. That is equivalent to 27.4% of the crude and 19.5% of the natural gas normally produced daily from federal leases in the gulf.

Cumulative production lost during the 4 months of Aug. 26-Dec. 29 totaled 108.8 million bbl of crude and 560.8 bcf of natural gas, respectively equivalent to 19.9% of the crude and 15.4% of the natural gas produced annually from those federal offshore leases.

The US Energy Information Administration reported the withdrawal of 162 bcf of natural gas from US underground storage in the week ended Dec. 23 (OGJ Online, Dec. 29, 2005). That figure "reflects about the same level of incremental 'backed-out' demand as [the previous] week... due to fuel-switching to distillate fuel oil," said Robert S. Morris at Banc of America Securities LLC, New York. He said US distillate demand was up by 5.2% from year-ago levels during the prior 4 weeks and could "partially be attributed to fuel-switching recently away from natural gas, with gasoline demand up 1%."

Despite the recent warming trend across the US, forecasts for the remaining winter months remain mixed. "Assuming normal temperatures from now through March, we estimate that natural gas storage levels will be roughly [1.07 tcf] at the end of winter," Morris said. Every 1% deviation in weighted heating degree days for the January through March would equate "to a roughly 30 bcf change in our end-of-March storage forecast," assuming no changes in fuel switching or backed-out demand, he said.

Energy prices
The February contract for benchmark US light, sweet crudes gained 72¢ to $61.04/bbl Dec. 30 on the New York Mercantile Exchange, while the March contract advanced by 98¢ to $61.90/bbl in light trading during a short session prior to the long New Year holiday weekend, with the market closed Jan. 2. On the US spot market, West Texas Intermediate at Cushing, Okla., increased by 72¢ to $61.04/bbl.

Gasoline for January delivery jumped by 5.76¢ to $1.71/gal on NYMEX as traders continued to react to an earlier EIA report that US gasoline inventories tumbled by 1.2 million bbl to 202.9 million bbl during the week ended Dec. 22 (OGJ Online, Dec. 29, 2005). The January heating oil contract rose by 2.51¢ to $1.73/gal.

The February natural gas contract inched up by 0.2¢ to $11.23/MMbtu on NYMEX in the abbreviated and thinly traded preholiday session. "NYMEX natural gas prices have averaged about $9/MMbtu [in 2005], compared with an average of $6.177/MMbtu in 2004," said analysts at Enerfax Daily. "The US economy expanded at a 4.3% annual rate in the third quarter, the quickest pace since the start of last year," they reported Jan. 3.

In London, the February contract for North Sea Brent crude escalated by 91¢ to $58.98/bbl on the International Petroleum Exchange. Gas oil for January gained $4.25 to $510.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by 57¢ to $53.47/bbl on Dec. 30. For all of 2005, that basket price averaged a record $50.64/bbl.

Contact Sam Fletcher at [email protected].