MARKET WATCHCrude prices continue downward spiral

Nov. 15, 2006
Near-month crude futures price climbed briefly to $59.15/bbl Nov. 14 on the New York market before continuing a 3-day downward spiral amid mild weather in the Northeastern US.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 15 -- Near-month crude futures price climbed briefly to $59.15/bbl Nov. 14 on the New York market before continuing a 3-day downward spiral amid mild weather in the Northeastern US.

However, prices were trending up in early trading Nov. 15 in anticipation of the Nov. 23 US Thanksgiving holiday. "More people travel over the Thanksgiving holiday than any other holiday in the US. The American Automobile Association, the nation's largest motoring organization, expects 31.7 million travelers to hit the road. That number of motorists is about 83% of the total number of travelers expected over the November 23-26 period," said analysts in the Houston office of Raymond James & Associates Inc.

US Inventories
The US Energy Information Administration said Nov. 15 commercial inventories of US crudes rose by 1.3 million bbl to 336 million bbl during the week ended Nov. 10. US gasoline stocks, however, fell 3.7 million bbl to 200.3 million bbl during the same period and are now in the lower half of the average range. Distillate fuel inventories dropped 3.6 million bbl to 135 million bbl, with a slight increase in heating oil buried by a significant decline in diesel fuel.

Imports of crude into the US dropped by 337,000 b/d to 9.5 million b/d in the latest period. Output from US refineries declined by 221,000 b/d to 14.9 million b/d, with units operating at 87.3% of capacity. Gasoline production decreased slightly to 8.7 million b/d, while distillate fuel production remained relatively constant at 4 million b/d.

In its latest monthly oil market report, OPEC warned that, if it continues producing at current levels, there would be a bigger than usual build in oil inventories among consumer nations in the second quarter of 2007. It expects world oil demand to grow 1.33 million b/d to 85.58 million b/d in 2007 due to stronger demand from China.

"As the demand grows, however, OPEC sees sources from Russia and the Caspian entering the market, leading to a drop in the demand for OPEC oil by about 700,000 b/d," Raymond James analysts said. "This explains the recent rhetoric coming out of Kuwait, Iran, and other OPEC members to enact a second cut when the cartel meets Dec. 14. For reference, OPEC's 2007 demand forecast is below that of the International Energy Agency and the US government (and ours as well)."

Meanwhile, OPEC ministers said Nov. 15 their recent decision to cut production by 1.2 million b/d effective Nov. 1 "appears to have largely achieved its purpose of stabilizing markets and arresting the sharp fall in oil prices seen the last few months." The average price for OPEC's basket of 11 benchmark crudes plunged 27% from a peak of $72.68/bbl Aug. 8 to $53.37/bbl Oct. 30. More recently, OPEC's average basket has fluctuated within a narrow range of $53-56/bbl, ministers said.

They claim the recent sharp fall in crude oil prices may indicate the end of the steady bullish phase that has characterized the market since 2004. They reported the market may be entering into a "transitional phase," characterized by slowing global economic growth, downward revisions in oil demand growth, plentiful stocks among developed nations, and a surge in non-OPEC supply.

"With the start of the winter season in the US Northeast, the fall in heating oil inventories in the last 4 weeks has triggered some concerns about the adequacy of these seasonally important stocks," the report said. "However, a closer look at US data reveals that despite consecutive draws, heating fuel stocks remain 15% higher than a year ago and 10% above the last 5-year average." The report attributed the recent drop in heating oil stocks to a fall in production as well as imports, reflecting "the typical refinery maintenance cycle at this time of year, rather than an indication of any shortage in crude supplies."

Energy prices
The December contract for benchmark US light, sweet crudes closed at $58.28/bbl, down 30¢ for the day on the New York Mercantile Exchange. The December contract lost 41¢ to $60.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 30¢ to $58.29/bbl. Unleaded gasoline for December delivery increased by 0.78¢ to $1.54/gal, however. Heating oil for the same month inched up 0.32¢, but its closing price was virtually unchanged at $1.66/gal.

The December natural gas contract traded as high as $8.22/MMbtu Nov. 14 on NYMEX before closing at $7.98/MMbtu, up 8.3¢ for the day. A closing price for Henry Hub gas on the US spot market was not available at press time, however.

In London, the December IPE contract for North Sea Brent crude dropped 21¢ to $58.84/bbl. The December gas oil contract gained $7 to $528.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes fell by 23¢ to $55.19/bbl Nov. 14.

Contact Sam Fletcher at [email protected].