MARKET WATCHWarm winter melts energy prices

Dec. 12, 2006
Energy prices continued to decline Dec. 11, with natural gas for January closing at the lowest level in 6 weeks because of mild weather in the US.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 12 -- Energy prices continued to decline Dec. 11, with natural gas for January closing at the lowest level in 6 weeks because of mild weather in the US.

"Weather remains the primary catalyst" ahead of the scheduled Dec. 14 meeting of ministers of the Organization of Petroleum Exporting Countries in Nigeria, said analysts in the Houston office of Raymond James & Associates Inc. "While rhetoric from a majority of its members point towards an additional cut [in OPEC production at that meeting], some have voiced concern about the effect of higher oil prices on the slowing US economy," the analysts noted.

"Although crude has broken out of its sluggish range around $60[/bbl], it remains near its lows for the year, reflecting the market's doubts about the implementation of [earlier] OPEC production cuts," Raymond James analysts said. "The lingering decline in oil prices also reflects a shift in market psychology regarding the magnitude of geopolitical risk to oil supply, especially relating to Iran. However, we believe that various international supply disruptions, coupled with continued geopolitical risk, are likely to keep oil prices at elevated levels."

Raymond James analysts said: "For the first 3 weeks of November, the market relayed its skepticism about OPEC's reported production cuts [of 1.2 million b/d effective Nov. 1] into oil prices, which remained stagnant at around $59/bbl. During the last week of the month, however, a series of remarks from OPEC further increased the probability of another supply cut, which will likely be addressed at OPEC's meeting.

"As a response to this and relatively bullish petroleum inventory data in the US, crude broke through the resistance level to its 2-month high north of $63[/bbl] at the end of November. In the past week, oil has retraced some of this gain on mild weather forecasts, trading closer to $62/bbl," they said.

Meanwhile, Merrill Lynch & Co. cut its estimate for oil prices to an average $60/bbl in 2007, down from $65/bbl previously, because of slower economic growth and increasing supply. However, it hiked its 2008 estimate to $62/bbl from an earlier prediction of $50/bbl in expectation that demand will rebound.

Energy prices
The January contact for benchmark US sweet, light crudes fell 81¢ to $61.22/bbl, its lowest closing in nearly 2 weeks on the New York Mercantile Exchange. The February contract lost 73¢ to $62.36/bbl on Dec. 11. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 81¢ to $61.23/bbl. Heating oil for January delivery declined by 3.3¢ to $1.72/gal on NYMEX. Unleaded gasoline for the same month slipped by 2.25¢ to $1.60/gal.

The January natural gas contract dropped 13.4¢ to $7.43/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., fell 53¢ to $6.87/MMbtu. "Through October and November, natural gas prices rebounded from the 4-year lows in September, hitting a 9-month high on the last day of the month at $9/Mcf," Raymond James analysts reported.

"So far in December, gas has traveled back below $8[/Mcf]. We believe this sharp pullback is primarily driven by moderation in the weather forecast. However, this weakness may continue for the next 3 weeks as we are set to experience the most difficult year-over-year weather comparables (last year at this time we experienced extremely cold weather that is unlikely to be repeated this year)," they said.

"Any retracement in natural gas prices over the next 3 weeks should be viewed as a buying opportunity before we head into easy weather comps in January and February. We look for a continued rebound in gas prices going into 2007, as we believe that the gas storage overhang will gradually dissipate," Raymond James analysts said.

In London, the January IPE contract for North Sea Brent crude declined by 36¢ to $61.84/bbl. The December gas oil contract dropped $16.50 to $540/tonne, wiping out the price escalation in the previous session.

The average price for OPEC's basket of 11 benchmark crudes fell 89¢ to $57.74/bbl on Dec. 11.

Contact Sam Fletcher at [email protected].