MARKET WATCH: Possibility of OPEC production boost lowers crude prices

The front-month contract for crude oil continued its downward spiral in the New York market, dropping 1.4% Jan. 24 to near an 8-week low after Saudi Arabia’s energy minister indicated the Organization of Petroleum Exporting Countries might increase production.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 25 -- The front-month contract for crude oil continued its downward spiral in the New York market, dropping 1.4% Jan. 24 to near an 8-week low after Saudi Arabia’s energy minister indicated the Organization of Petroleum Exporting Countries might increase production.

Natural gas fell 3.3% after reaching a 6-month high in after-hours electronic trading, said analysts in the Houston office of Raymond James & Associates Inc.

Saudi Oil Minister Ali Al-Naimi was quoted in news reports Jan. 24 as saying, “OPEC’s policy is to meet any increase in oil demand to maintain the supply-demand balance. Some OPEC countries will increase their production capacities, thus maintaining OPEC’s spare capacity at approximately 6 million b/d.”

At Standard New York Securities Inc., the Standard Bank Group, analyst James Zhang said, “As Saudi holds the majority of OPEC’s spare capacity, the reaction of the oil price appears to show the markets’ sensitivity to comments out of Saudi.”

Zhang said, “The oil market is likely to continue its downward correction for now, while waiting for the US weekly inventory report [scheduled for release Jan. 26]. Brent has so far held surprisingly well relatively to WTI. This might change soon as signs of a weaker market have been given away by the softer Dubai flat price and term structure and weaker product cracks.”

The Brent forward curve price projection on the IntercontinentalExchange Inc. (ICE) is extremely flat through 2011, with only a 75¢/bbl difference between the March and December contracts, reflecting a “greater need for prompt oil in the physical market,” said analysts at the Centre for Global Energy Studies (CGES). However, they figure “OPEC will fail to provide enough additional crude to keep a lid on prices, at least initially, resulting in dated Brent reaching almost $105/bbl in June and July of this year.”

The price of crude will decline when OPEC members “eventually start to pump more crude in order to avoid damaging the demand for [their] oil in future in the developing world and choking off the fragile economic recovery in the Organization for Economic Cooperation and Development countries,” said CGES analysts. Even so, they expect dated Brent to average above $100/bbl this year.

WTI-Brent spread
Zhang noted the front-month spread between West Texas Intermediate and North Sea Brent spread weakened to $8.65/bbl on Jan. 24. Product cracks generally traded lower, and term structures for WTI, Brent, and ICE gas oil weakened.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Crude oil futures markets continue to be dominated by the volatility in the Brent-WTI [spread], which is as large if not larger than on flat price. Yesterday the Brent premium to WTI increased further on a closing basis but with very significant intraday volatility.

Jakob worries “about the volatility potential of the Brent-WTI spread as we see more small speculators and momentum chasers entering that trade.” He said, “The Brent open interest reached a new all-time record high [Jan. 21]. Combining the open interest on ICE and the New York Mercantile Exchange, Brent open interest has now passed the milestone of 1 million contracts.”

He warned, “WTI is moving deeper into a negative momentum and is now testing an important support line at $87.15/bbl for the weekly charts.” That support line has held since early December, “hence it will be crucial for WTI to hold on to it” after closing “a few points below its 50-day moving average ($88/bbl)” on Jan. 24, he said.

“Brent is still better supported than WTI and is less in a negative momentum,” Jakob said. “It did however reverse intraday the trend of increasing its premium to WTI and did not manage to close above its 5-day moving average. Brent needs to hold to the 20-day moving average at $96.10/bbl. Given the extreme Brent premium to WTI, Brent currently holds more downside flat price risk than WTI as it could suffer both from a flat price correction and from a Brent-WTI spread correction.”

In other news, the euro rose further in financial markets. “The market seems to think that the euro-zone debt crisis will somehow be resolved. In the meantime, the International Monetary Fund raised its forecast of global gross domestic product growth from its earlier estimate of 4.2% to 4.4% in 2011, citing stronger growth in the US,” Zhang said.

Energy prices
The March contract for benchmark US sweet, light crudes dropped $1.24 to $87.87/bbl Jan. 24 on NYMEX. The April contract lost $1.10 to $89.53/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.44 to $86.67/bbl.

Petroleum product prices fell, wiping out gains from the previous session. Heating oil for February delivery decreased 3.15¢ to $2.62/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 4.57¢ to $2.41/gal.

The February natural gas contract ended its rally, falling 15.6¢ to $4.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., retreated 1.5¢ to $4.72/MMbtu.

In London, the March IPE contract for North Sea Brent crude surrendered most of its gain from the previous session, down 99¢ to $96.61/bbl. Gas oil for February continued to climb, gaining $5.25 to $819.25/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 30¢ to $93.20/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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