MARKET WATCHCrude price increases on OPEC speculation

Dec. 8, 2006
The front-month crude futures contract price rose for the first time this week in the New York market after tanker-tracer Oil Movements said Dec. 7 that OPEC apparently has reduced oil production by 800,000 b/d.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 8 -- The front-month crude futures contract price rose for the first time this week in the New York market after tanker-tracer Oil Movements said Dec. 7 the Organization of Petroleum Exporting Countries apparently has reduced oil production by 800,000 b/d.

That's still short of the 1.2 million b/d cut that OPEC members agreed to in October, effective Nov. 1. But it's up from the 550,000 b/d reduction that other analysts previously estimated. A third source, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said OPEC members apparently pushed additional production into world markets in October, prior to the scheduled November cut (OGJ Online, Dec. 7, 2006).

Meanwhile, crude futures prices climbed back above $63/bbl in early trading Dec. 8 in expectation of an agreement to make a second production cut when OPEC ministers meet Dec. 14 in Nigeria. "OPEC seems determined to defend and maintain oil prices above $60/bbl," said analysts in the Houston office of Raymond James & Associates Inc.

Natural gas outlook
The January natural gas contract closed Dec. 7 at its lowest price in 10 weeks after the US Energy Information Administration reported the withdrawal of 11 bcf of gas from US underground storage during the week ended Dec. 1. That was less than the consensus of Wall Street analysts and down from withdrawals of 32 bcf the previous week and 62 bcf during the same period a year ago. US gas storage now exceeds 3.4 tcf, up 232 bcf from year-ago levels and 282 bcf above the 5-year average.

The January gas contract closed at $7.67/MMbtu, down 5.6¢ for the day, after trading at $7.58-7.82/MMbtu Dec. 7 on the New York Mercantile Exchange. On the US spot market, gas at Henry Hub, La., escalated by 26.5¢ to $7.66/MMbtu.

"US natural gas withdrawal rates look modest so far, but the key period for withdrawals is yet to come," said analysts at Barclays Capital Inc., London. Colder weather predicted for the US next week is expected to trigger bigger withdrawals of gas from storage.

J. Marshall Adkins with Raymond James in Houston said, "The large withdrawals last year during this period (due to an abnormally cold spell last year) may lead to a possible increase in the year-over-year natural gas storage surplus over the next few weeks. Despite this small hiccup, we still believe we will be an average of approximately 5 bcfd tighter throughout the withdrawal season."

That's based on Raymond James estimates that gas supplies will be tighter by 250 MMcfd this year while demand will be higher by 4.5 bcfd due to "the combined effect of a 1.75% year-over-year increase" in industrial demand.

"Finally, we are forecasting a normal winter (as it relates to weather), which should translate into running about 2 bcfd tighter for the duration of the winter season," Adkins said. "Based on these assumptions, we believe that the natural gas overhang experienced throughout the injection season will dissipate and winter storage levels should be in the range of 1.2-1.3 tcf, more in-line with historical averages." As a result, he said, "We remain comfortable with our 2007 gas price forecast of $10[/MMbtu]."

Other energy prices
Prices were mixed Dec. 7, with the January contract for benchmark US light, sweet crudes escalating by 30¢ to $62.49/bbl on NYMEX, while the February position retreated by 14¢ to $63.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 30¢ to $62.50/bbl. Unleaded gasoline for January delivery inched up by 0.63¢ to $1.63/gal on NYMEX. Heating oil for the same month, however, lost 1.52¢ to $1.78/gal.

In London, the January IPE contract for North Sea Brent crude fell 50¢ to $62.57/bbl. The December gas oil contract dropped $6.25 to $547.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes declined by 44¢ to $58.66/bbl on Dec. 7.

Contact Sam Fletcher at [email protected].