MARKET WATCH: Energy prices continue to spiral down

Dec. 18, 2007
Cold weather in the US Midwest and Northeast pulled up crude prices in early trading Dec. 17 before worries over the economy continued the downturn in the New York market.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 18 -- Cold weather in the US Midwest and Northeast pulled up crude prices in early trading Dec. 17 before worries over the economy continued the downturn in the New York market.

The New York Mercantile Exchange "corrected down for the third consecutive day on the combination of the upcoming expiry in contango, a dollar index holding ground, and equities under continued pressure," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The correction remains however very orderly and is lacking enough strength to break the support lines. Open interest keeps on declining as positions are being reduced ahead of the holidays, and we are not yet in a scenario where aggressive new short positions are being taken. We are unlikely to see those until more substantial stock builds are apparent in the weekly statistics, and with the end of the year stock tax plays the market should remain in a wait-and-see attitude," Jakob said.

Moreover, he said, "With Turkey sending some light troops into northern Iraq and French workers reported starting to strike at Total SA refineries, it should be even harder today to break the support lines."

Front-month oil prices were up in early trading Dec. 18 on news that Turkish troops attacked Kurdish guerillas in northern Iraq. "An estimated 700 Turkish soldiers entered into northern Iraq in an assault on Kurdish militants who have carried out cross-border attacks. A disruption to the Iraqi northern pipeline would exacerbate an already tight global oil market with limited spare production capacity," said analysts in the Houston office of Raymond James & Associates Inc.

There were news reports of a Dec. 16 air strike by Turkish aircraft on Kurdish targets in northern Iraq, the first such attack since Turkey passed an October resolution approving cross-border raids on the Kurdistan Workers Party (PKK) that have been attacking Turkish bases since the 1970s. Apparently the US military, which controls air space in Iraq, provided a 3-hr window for the nighttime air attack.

Market outlook
Still, Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., said "Crude oil prices have shown remarkable strength this year, and, while we remain concerned about the potential for a near-term pullback, we believe that prices are unlikely to fall much below the $70/bbl level and will most likely average $85/bbl, or more, for the next several years."

Bernstein expects the Organization of Petroleum Exporting Countries will continue managing production to maximize prices. "We estimate that the Saudi economy is fully funded at about $65/bbl for West Texas Intermediate and that some of the smaller producers (i.e., Iran and Venezuela) have higher requirements. This should serve as a price floor; however, we ask, why would they want to leave money on the table?" he said in a Dec. 18 report. "It is important to recall that, late last year, slowing demand growth concerns prompted OPEC member countries to cut production by more than 1 million b/d, and, despite the current $90/bbl crude oil price environment, on Dec. 5 the cartel decided to take a 'wait and see' approach, leaving its production quotas unchanged."

Bernstein also noted emerging markets are consuming ever more crude. "As a result, we are raising our 2008 crude oil price forecast from $60/bbl to $80/bbl and our long-term price forecast from $55/bbl to $85/bbl," he said. "This puts us well ahead of consensus expectations but modestly below the NYMEX futures strip, which has proven a better predictor of crude oil prices during the past several years."

Nevertheless, FBR analysts see crude prices "poised for a pullback" to an average $75/bbl in the first half of 2008. "Crude oil prices typically rally during the second half of the year on concerns that supplies could be tight during the upcoming winter season; however, if new economic data point to a larger-than-expected slowdown or if winter disappoints, as it did last year, this positive momentum could quickly reverse," they said. "Additionally, while many emerging markets are currently enjoying robust economic growth, we believe investors would be well served to remember the old saw that 'When the US sneezes, the rest of the world catches a cold.'" FBR assumes world demand for crude will increase 1.3% or 1.1 million b/d in 2008.

Energy prices
The January contract traded as high as $91.95/bbl Dec. 17 on NYMEX before closing at $90.63/bbl, down 64¢ for the day. The February contract lost 50¢ to $91.05/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 64¢ to $90.64/bbl. Heating oil for January delivery dipped by 1¢ to $2.60/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) slipped 0.63¢ to $2.34/gal.

The January natural gas contract declined 1¢ to $7.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.5¢ to remain virtually unchanged at 7.09/MMbtu.

In London, the February IPE contract for North Sea Brent crude lost 40¢ to $91.29/bbl. The January gas oil contract dropped $8.75 to $814.75/tonne.

The average price for OPEC's basket of 12 reference crudes fell 69¢ to $87.28/bbl on Dec. 17.

Contact Sam Fletcher at [email protected].