MARKET WATCH: Oil prices near $100/bbl again before falling back

Sam Fletcher
Senior Writer

HOUSTON, Dec. 31 -- Crude prices climbed to nearly $98/bbl before falling back in profit taking Dec. 28, ending four sessions of consecutive gains on the New York market.

"Crude is trading relatively flat this morning, the last trading day of the year," said analysts Dec. 31 in the Houston offices of Raymond James & Associates Inc. "Iran's announcement that it plans to build its first nuclear reactor in 2008, along with continued political tension in Pakistan, has recently been keeping crude prices within striking distance of $100/bbl. Crude is up 58% since it opened 2007 at $60/bbl, and the [average] $35 increase is the largest yearly gain of the decade. Natural gas is down slightly this morning, but gained nearly 4% on [Dec. 28] as the draw from US storage was reported as 165 bcf, nearly 20 bcf more than consensus estimates. The year-over-year natural gas storage deficit continues to rise and is now up to 120 bcf."

Moreover, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, reported Dec. 31, "The dollar index has lost last week most of the gains of the three previous weeks. As crude oil is pricing near nominal record highs, it will remain a key directional input. On a dollar index adjusted basis, crude oil has made new record highs last week; hence the situation is getting worse rather than better for emerging countries that are subsidizing internal retail prices. For these countries the oil processing economics are turning even more negative and will maintain supply disruptions (e.g. China importing products due to small refineries unwilling to process) or budgetary disruptions (cut in taxes or tariffs)."

Demand outlook
Raymond James analysts said, "With the enactment of the new energy bill earlier this month, US fuel economy standards are set to change for the first time in over 3 decades. The new law requires an increase in average vehicle fuel economy to 35 mpg by 2020, up from the current standard of 25 mpg (a blend of 27.5 mpg for cars and 22.2 mpg for light trucks) that was set in 1975. What will this mean for global oil demand? The simple answer is…not much."

Raymond James reported, "The reality is that average US vehicle fuel economy will probably not get anywhere close to 35 mpg over the next decade. Remember that the current 25 mpg standard was set over 30 years ago, and the most recent data suggests the US is currently averaging less than 17 mpg. So much for standards. Even if the auto companies can improve mileage, we believe that any reduction of US oil (gasoline and diesel) consumption would be more than offset by increasing Chinese oil demand over the next decade. That means the energy bill is a relatively meaningless step towards slowing oil demand growth and, therefore, is highly unlikely to substantially alter the global oil demand picture over the next decade."

Energy prices
The February crude contract for US light, sweet crudes soared as high as $97.92/bbl in early electronic trading Dec. 28 before closing at $96/bbl, down 62¢ for the day on the New York Mercantile Exchange. The March contract lost 51¢ to $95.76/bbl. On the US spot market, West Texas Intermediate at Cushing was down 62¢ to $96.01/bbl. The January heating oil contract dropped 4.33¢ to $2.64/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) declined 3.65¢ to $2.46/gal.

The new front-month February natural gas contract escalated by 18.6¢ to $7.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 33.5¢ to $7.13/MMbtu with a larger-than-expected draw of natural gas from US underground storage (OGJ Online, Dec. 28, 2007). "The variance in this week's higher-than-expected [withdrawal report] was entirely in the producing region, which has continued to be quite variable relative to local heating degree days and can be influenced by cycling of gas out of salt cavern storage, fluctuations in LNG imports, and production shut-ins resulting from power outages during ice storms in the Texas and Oklahoma," said Robert S. Morris, Banc of America Securities LLC, New York.

In London, the February IPE contract for North Sea Brent dropped 90¢ to $93.88/bbl. Gas oil for January lost $2 to $845/tonne.

An update of the average price of the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes was not available Dec. 31.

Contact Sam Fletcher at [email protected].