MARKET WATCHCrude price rally continues with cold weather

Dec. 4, 2006
Crude futures prices climbed to a 2-month high Dec. 1 as the first major cold front of the season reached New York after spreading across most of the Midwest.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 4 -- Crude futures prices climbed to a 2-month high Dec. 1 as the first major cold front of the season reached New York after spreading across most of the Midwest.

"The onset of cold weather across much of the country led the surge in commodity prices, particularly natural gas prices [through most of the week], along with Saudi Arabia taking a more adamant stance that the Organization of Petroleum Exporting Countries should further reduce output at its meeting on Dec. 14," said Robert S. Morris, Banc of America Securities LLC, New York. "This was followed by a very bullish US crude plus product inventory report with an unexpected drop in gasoline and distillate stocks. In addition, continued attacks on oil infrastructure in Iraq and unrest in Nigeria lent support to crude oil prices."

However, analysts in the Houston office of Raymond James & Associates Inc. said oil and gas futures were down in early trading Dec. 4 in New York on a National Weather Service forecast of higher-than-normal US temperatures Dec. 9-13. "We view this as a minor correction, before prices continue their upward trend," said Raymond James analysts.

Analysts noted that the US dollar has fallen 3.8% against the euro in the last 2 weeks. "This fall has given more support to members of OPEC that are calling for a production cut," said Raymond James. "At this point it is a little early to tell [whether such a cut will occur] given that the November OPEC crude oil production numbers have not been released. As soon as these numbers become available, the market will gain further visibility as to the magnitude of any potential cut."

Raymond James analysts said: "Of the 11 current OPEC members, only one—Saudi Arabia—truly matters in terms of its role within the cartel, because it is a swing producer and the only member with meaningful excess capacity. All the other countries matter as individual oil producers, but that would be true whether or not they are in OPEC. We believe the same holds for Sudan, Ecuador, and Angola [which recently have expressed interest in joining OPEC].

"Even in the aggregate, their contribution to OPEC would be slight, and individually, it would be negligible. In sum, the effect of their joining OPEC is a nonevent as it relates to the commodity and energy stocks. Further, the addition of these new members brings greater political instability to the organization."

They said, "The more relevant near-term event for crude oil and energy stocks is OPEC's next meeting in 2 weeks to discuss another production cut for its members. In that context, most of these countries are equally (un)likely to abide by whatever official announcements are made, given that they rely heavily on oil revenues for their national budgets. Bottom line: Watch the actual production numbers from Saudi Arabia, Kuwait, and the UAE to see if the oil market will balance over the next couple of quarters."

Meanwhile, in its latest global oil report, the Centre for Global Energy Studies in London, said, "OPEC's basket price seems to have stabilized [in recent weeks] around $55/bbl, with most of the credit for price stability being ascribed to rising demand from refiners around the world, who have been returning from turnarounds, rather than to OPEC, whose members pledged a production cut of 1.2 million b/d as of Nov. 1 but have delivered only around 300,000 b/d, two thirds of it from Saudi Arabia."

Energy prices
The January contract for benchmark US light, sweet crudes climbed 30¢ to $63.43/bbl, a 2-month high, Dec. 1 on the New York Mercantile Exchange. The February contract increased 39¢ to $65.01/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 30¢ to $63.44/bbl. Unleaded gasoline for January delivery gained 1.7¢ to $1.69/gal on NYMEX. Heating oil for the same month slipped by 0.23¢ but remained virtually unchanged at $1.85/gal. The January natural gas contract fell by 42.2¢ to $8.42/MMbtu, however. On the US spot market, natural gas at Henry Hub, La., decreased by 5¢ to $8.28/MMbtu.

In London, the January IPE contract for North Sea Brent crude rose by 36¢ to $64.82/bbl. But the December gas oil contract lost $4.25 to $562.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes escalated by 95¢ to $59.66/bbl on Dec. 1. So far this year, OPEC's basket price has average $61.34/bbl, compared with an average price of $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected].