MARKET WATCHCrude prices reach new 18-month lows

Jan. 11, 2007
The February contract for benchmark US light, sweet crudes broke through former market support at $55/bbl to close at $54.02/bbl, down $1.62 for the day, after trading at $53.44-55.81/bbl Jan. 10 on the New York Mercantile Exchange.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 11 -- The February contract for benchmark US light, sweet crudes broke through former market support at $55/bbl to close at $54.02/bbl, down $1.62 for the day, after trading at $53.44-55.81/bbl Jan. 10 on the New York Mercantile Exchange.

The next key support level for the February crude contract is now $50/bbl, "which in the current volatility can be reached in 2 days," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. That price "has now become the consensus and should be a strong support," he said. The holiday Jan. 15 in the US, to honor civil rights leader Martin Luther King Jr., "could lead to short covering and profit taking if we do approach more the $50/bbl level before the weekend."

Meanwhile, Jakob noted "some supportive flags that will need watching," including "for the first time this year" a reduction of all crude open interest for North Sea Brent and benchmark US crudes in New York and London markets. "This would suggest that some liquidation has started and while it can bring some further violent correction, a further confirmation of falling open interest would point to the start of an exhaustion move," said Jakob.

In addition, he said, "The rest of the commodity complex has found a floor for now. The oil correction is now purely an oil affair rather than a general commodity sell-off."

The latest report on US inventories showed demand dropping noticeably as mild winter weather continues. Commercial inventories of benchmark US crudes fell by 5 million bbl to 314.7 million bbl during the week ended Jan. 5. Gasoline stocks rose by 3.8 million bbl to 213.3 million bbl in that period, while distillate fuel inventories jumped by 5.4 million bbl to 141 million bbl, with gains in both heating oil and diesel (OGJ Online, Jan. 10, 2007). It marked the fourth consecutive week that distillate and gasoline supplies have increased, but crude inventories have been falling for 7 weeks.

"The tumbling crude oil price has had its effect on the Organization of Petroleum Exporting Countries, with its spokesman urging its members to 'comply with the agreed cuts,'" said analysts in the Houston office of Raymond James & Associates Inc. "OPEC had announced a cut of 1.2 million b/d in October, and another 500,000 b/d production cut is scheduled to take place in February. Our analysis suggests that only about 65% of the agreed October cuts have been implemented. The latest slide may just tip the scales in favor of better compliance with the next agreed production cut."

Other energy prices
The March contract for benchmark US light, sweet crudes dropped $1.78 to $54.96/bbl Jan. 10 on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.62 to $54.03/bbl. The February contract for reformulated blendstock for oxygenate blending (RBOB) lost 4.04¢ to $1.43/gal on NYMEX. Heating oil for the same month declined 3.1¢ to $1.53/gal.

However, the February natural gas contract escalated by 12.4¢ to $6.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped by 36¢ to $6.42/MMbtu. "Short-term weather forecasts from the National Oceanic and Atmospheric Administration (both 6-10 day and 8-14 day) continue to show that colder weather is likely in the latter part of January. This may provide some support to natural gas prices," Raymond James analysts said.

Meantime, EIA reported the withdrawal of 49 bcf of natural gas from US underground storage in the week ended Jan. 5. That was above the consensus of Wall Street analysts and compares with withdrawals of 47 bcf the previous week and 20 bcf a year ago. US storage is now slightly above 3 tcf of gas, up by 401 bcf from year ago levels and 461 bcf above the 5-year average.

In London, the February IPE contract for North Sea Brent crude fell by $1.49 to $53.69/bbl. Gas oil for January dipped by 25¢ to $484.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes dropped 61¢ to $50.56/bbl on Jan. 10.

Contact Sam Fletcher at [email protected].