MARKET WATCHCrude price closes at new high for 2007

The March contract for benchmark US light, sweet crudes couldn't sustain its break through the $60/bbl price ceiling Feb. 9, but managed to hang onto the highest closing for a front-month contract in the New York market so far this year.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 12 -- The March contract for benchmark US light, sweet crudes couldn't sustain its break through the $60/bbl price ceiling Feb. 9, but managed to hang onto the highest closing for a front-month contract in the New York market so far this year.

The contract traded as high as $60.80/bbl Feb. 9 before finishing at $59.89/bbl, up 18¢ for the day on the New York Mercantile Exchange.

"Oil prices struggled early in the week, particularly after US...inventory data revealed a much greater-than-expected build in gasoline stocks concurrent with a draw in crude inventories whereas a strong build was anticipated," said Robert S. Morris, Banc of America Securities LLC, New York. "However, continued colder-than-normal temperatures along with reported improved compliance [by members of the Organization of Petroleum Exporting Countries] with recent production cuts ultimately gained the upper hand. In addition, geopolitical tensions moved more to the forefront ahead of the [United Nations] Security Council's Feb. 20 meeting to review sanctions imposed on Iran in December while Iran has remained vocally defiant with regard to its uranium enrichment program despite these sanctions."

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "One of the key fundamental inputs of the week was the decision by Nigeria to curtail its February and March lifting programs. Since those programs were already nominated, it had to announce force majeure. By [Feb. 9] the full assessment of the situation was still not clear as to the extent of how many barrels will really be not available (apart from just being pushed forward to later dates)."

Moreover, he said, "Hibernia in Canada announced it was shutting down in mid-February for a month (production was 180,000 b/d in December but only around 120,000 b/d in January). The combination of the Hibernia outage, the Nigerian cuts, and the lower North Sea programs would take out about 15 million bbl of prompt sweet Atlantic basin crude oil availabilities and should start to tighten the crude oil physical market as refiners will start to embark on the purchasing list for the spring runs."

By spring, said Jakob, "We still should have the US strategic petroleum reserves looking to refill 11 million bbl and the North Sea oil platforms engaging in their seasonal maintenance."

Nevertheless, crude futures prices were lower in morning trading Feb. 12 in New York "on the news that OPEC believes the world oil markets will be over supplied by 300,000 b/d during the second quarter, even after the latest round of production cuts," said analysts in the Houston office of Raymond James & Associates Inc. "Saudi Aramco has announced it will increase crude shipments to Asia in March. In accordance with the OPEC production cuts, Aramco supplied 14% less than contracted volumes to Asia in February. Currently, Aramco is planning to supply only 7% less than contracted volumes for March," they said.

In other news, Jakob reported, "The price of ethanol in the Midwest went up on the back of barge movement disruption on the Illinois and upper Mississippi because of the cold and ice, but corn prices also rose, as well as natural gas. This winter was clement until the last 2 weeks. With the transportation hurdles surrounding ethanol, we will watch in coming winters for more pronounced logistic disruption, making winter weather a pricing element to be taken in account."

Energy prices
The April contract for benchmark US light, sweet crudes gained 20¢ to $60.63/bbl Feb. 9 on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 18¢ to $59.90/bbl. Heating oil for March delivery inched up by 0.01¢ but remained virtually unchanged at $1.73/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) climbed by 2.15¢ to $1.61/gal.

The March natural gas contract slipped by 4.4¢ to $7.83/MMbtu on NYMEX. On the US spot market, however, natural gas at Henry Hub, La., increased by 9.5¢ to $8.15/MMbtu. "Over the past month, US natural gas prices have had a great run, as a return to more seasonal temperatures has helped eliminate the year-over-year gas storage overhang. Now that US gas inventories are no longer as bloated and US gas supply and demand has come more into balance, gas prices should trade closer to a 1:7 ratio with crude prices, said Raymond James analysts.

"With the 12-month gas price strip now around $8.50/Mcf, the futures market is now appropriately pricing in a more constructive long-term natural gas outlook. If these higher US natural gas prices hold, the stock market's anticipated meltdown in the US drilling market may not be as severe as current gas weighted stocks are discounting. When the stock market psychology shifts toward a more bullish US drilling activity outlook, we should see a renewed interest in the beaten down North American natural gas levered stocks," they said.

In London, the March IPE contract for North Sea Brent crude dipped by 2¢ to $59.01/bbl. However, gas oil for February increased by $11.50 to $526.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by $1.47 to $54.99/bbl on Feb. 9. So far this year, OPEC's basket price has averaged $51.55/bbl, down from $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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