MARKET WATCH: Crude prices continue to slip

Energy prices continued to slip lower as the Organization of Petroleum Exporting Countries declined Dec. 5 to increase current production levels.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 6 -- Energy prices continued to slip lower as the Organization of Petroleum Exporting Countries declined Dec. 5 to increase current production levels.

"The OPEC meeting was in the end largely ignored and as with the previous meeting the focus swiftly moves back to the upcoming decisions of central banks," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The dollar index gained close to 1% [on Dec. 5] and is now back to the levels of early November," he said. "With no clear signs from oil fundamentals, the dollar index should be a key directional input well into next week."

The only possible reason for OPEC to increase production again would be "an overt and evident upwards momentum in prices," said Paul Horsnell at Barclays Capital Inc., London. Besides, the previous 500,000 b/d increase that OPEC approved in September effective Nov. 1 "is yet to come through, with that delayed increase having been even further delayed by heavy UAE maintenance [of wells] in November," he said.

The 'Iranium' issue
Meanwhile, Jakob said, "The 'Iranium' premium [now built into crude prices] keeps falling and we still expect to see some announcement soon of a new truce in the Bayelsa state of Nigeria." Earlier this week, US intelligence agencies agreed Iran stopped its nuclear weapon program in 2003 and hasn't yet revived it (OGJ Online, Dec. 5, 2007).

However, Horsnell said, "The latest US National Intelligence Estimate (NIE) on Iranian nuclear intentions and capabilities muddies the waters fairly significantly. In terms of future US policy, it does not seem to represent a major watershed. Over recent months, there does appear to have been a growing relaxation on the part of the current administration in letting the issue continue beyond 2008, driven mainly by the view that the reasons for the drift towards confrontation are such that any new administration would have to continue with the process."

Now, Horsnell said, "The emphasis has gone from Iran being considered likely to build a weapon, to Iran having the material to make a weapon. Different in content, but perhaps not so different in policy implications. The more significant impact of the NIE is in the likely weakening of the chances of further [United Nations] Security Council action, with both Russia and China more likely to decouple from the process."

US inventories
The Energy Information Administration reported commercial inventories of benchmark US crudes fell 8 million bbl to 305.2 million bbl in the week ended Nov. 30. Gasoline stocks jumped up 4 million bbl to 200.6 million bbl during the same period. Distillate fuel inventories increased 1.4 million bbl to 132.3 million bbl (OGJ Online, Dec. 5, 2007). "The crude oil stock draw was much larger than any expectations but part of it is probably due to fog delays on the Houston Ship Channel," Jakob said. Imports of crude into the US fell 980,000 b/d to 9.4 million b/d during that week.

A Nov. 28 explosion and fire that killed two workers and temporarily shut down Houston-based Enbridge Energy Partners LP's main pipeline system carrying 1.5 million b/d crude—15% of total US oil imports—from Canada to Midwest refineries had "absolutely nothing to do" with the drop in US imports, "particularly into the Gulf Coast," Horsnell said. "US crude inventories have now fallen by just short of 50 million bbl over the past 5 months, and are now at their lowest level since September 2005."

Horsnell said, "The rise in distillate inventories follows seasonal norms and is made up of a large fall in heating oil and a larger rise in diesel." He said, "The bearish element is the larger-than-normal build in gasoline, bringing them back close to their 5-year average."

Jakob concurred, "Fundamentals are clearly deteriorating for gasoline (higher stocks, higher mandatory blending of ethanol in 2008, fluid catalytic cracking capacity coming back on line, slow demand)."

Energy prices
The January contract for benchmark US sweet, light crudes dropped 83¢ to $87.49/bbl Dec. 5 on the New York Mercantile Exchange. The February contract lost 82¢ to $87.29/bbl. On the US spot market, West Texas Intermediate was down 83¢ to $87.50/bbl. The January contract for reformulated blend stock for oxygenate blending (RBOB) fell 3.47¢ to $2.22/gal on NYMEX. Heating oil for the same month declined 2.25¢ to $2.49/gal.

The January natural gas contract increased 3¢ to $7.19/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., fell 34¢ to $7.06/MMbtu. EIA reported the withdrawal of 88 bcf of natural gas from US underground storage in the week ended Nov. 30. That was well above the general consensus of Wall Street analysts and compared with withdrawals of 12 bcf the prior week and 11 bcf in the same period a year ago. US gas storage is now at 3.4 tcf, up 32 bcf from last year's levels at this period and 273 bcf above the 5-year average.

In London, the January IPE contract for North Sea Brent crude lost $1.04 to $88.49/bbl, still priced above US benchmark crudes for the same month. "There is no way in which a Brent premium can be justified at this time," Horsnell said. "Compared to WTI, Brent is an inferior quality crude and has to cover trans-Atlantic freight when arbitraging with WTI, given that the US is an import market."

The December IPE contract for gas oil gained $7.75 to $795.50/tonne.

The average price for OPEC's basket of 12 reference crudes increased 17¢ to $85.50/bbl on Dec. 5.

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