MARKET WATCH: Crude rallies, gas price falls

Crude prices increased for the third consecutive session Nov. 18 on the New York Mercantile Exchange, buoyed by a weak dollar and unexpected declines in US oil inventories, but still wasn’t able to crack through its apparent ceiling of $80/bbl.

Nov 19th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 19 -- Crude prices increased for the third consecutive session Nov. 18 on the New York Mercantile Exchange, buoyed by a weak dollar and unexpected declines in US oil inventories, but still wasn’t able to crack through its apparent ceiling of $80/bbl.

Each time rising crude prices have encountered market resistance in the past month, the commodity has stalled below $80/bbl. “Without a significant catalyst to break out, look for crude to continue to trade in the $75 to $80 range,” said analysts at Pritchard Capital Partners LLC in New Orleans.

Meanwhile, the front-month natural gas contract suffered the largest single-day price drop since Oct. 1 due to forecasts of continued mild weather through the first week of December, Pritchard Capital Partners said.

The Energy Information Administration reported Nov. 19 the injection of 20 bcf of natural gas into US underground storage in the week ended Nov. 13. That boosted the amount of working gas in storage to 3.833 tcf, up 347 bcf from the same period a year ago and 419 bcf above the 5-year average. Prior to that report, Pritchard Capital analysts predicted that, with an injection larger than 19 bcf, natural gas futures prices could continue to fall “and test support at $4.”

They said, “While inventories traditionally begin to decline by the end of November, inventories are likely to continue to rise through November and come close to capacity at 3.9 tcf.”

EIA earlier reported commercial US crude inventories declined 900,000 bbl to 336.8 million bbl in the week ended Nov. 13. Gasoline stocks dropped 1.7 million bbl to 209.1 million bbl in the same period, while distillate fuel inventories were down 300,000 bbl to 167.4 million bbl (OGJ Online, Nov. 18, 2009).

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Crude stocks in Cushing[, Okla.] continue to build, and with continued high imports from Canada into the Midwest we do not expect that trend to end just yet, and this provides a risk for the re-creation of a wider contango on West Texas Intermediate.”

He noted, “US refinery runs remain low (79.4% of operable capacity), but stocks of the main products are not drawing in a significant manner, and this makes for continued low implied demand. Imports of gasoline are low but supplies are not that greatly impacted by the lower refinery crude runs. Runs are down vs. the levels of 2007 and 2008, but gasoline production is either at par or above the levels of the last 2 years. Overall stocks of all petroleum products and crude were down 4.2 million bbl.”

Natural gas outlook
Analysts at Energy Solutions Inc., Verona, Wis., expect a “rather surprising” post-Thanksgiving Day rally in gas prices, followed by another price decline through the end of December, “which will set the stage for the first quarter decline and more attractive NYMEX prices for the second half of 2010, 2011, and maybe even 2012.”

They said, “This rally isn’t expected to be based on much of anything other than some short-covering, but it is likely to give buyers somewhat of a scare. That is why we still believe making some winter purchases in this weaker price environment is prudent and will help you sleep better at night. However, by mid-December, we anticipate that rally to falter primarily because of record-level storage inventories. Plus, with summer 2010 prices trading at a 50¢/MMbtu premium to December 2009, the incentive to keep gas in storage remains strong.”

Energy Solutions explained, “It isn’t economically sound for storage owners to withdraw gas at today’s lower prices and refill at next summer’s higher prices if there is sufficient gas supplies in the physical market. That being said, some withdrawals will have to occur simply because of operational requirements, but those withdrawals could very well be on the low side. Fears over production declines are going to help to support prices, but if those dissipate and demand doesn’t rebound, watch out—sub-$4 prices for the second half of winter will be feasible.”

Moderate temperatures are expected to last through the weekend, “and then a more seasonal pattern is going to set-in,” said Energy Solutions analysts. However, they said, “During the Thanksgiving Day holiday, many industrial businesses reduce consumption, so the colder weather may not impact natural gas prices as much as many expect.”

While NYMEX gas futures prices have fallen in the past week, cash market prices have strengthened. On Nov. 13, gas was trading in the physical market at $2.20-2.65/MMbtu, “with the exception of [Pacific Gas & Electric Co.] in California which was over $3/MMbtu,” Energy Solutions analysts said. As of Nov. 18, physical prices had gained at least $1/MMbtu “in virtually all locations.”

They said, “The anticipation of 2 more weeks of storage injections are expected to keep natural gas prices subdued even if the weather does turn colder. Beyond that, there isn’t much new on the natural gas side. Economic data continues to be mixed; crude oil futures prices continue to be strong at $79-80/bbl; winter weather forecasts remain mixed, although there now appears to be some increased consensus about the potential for strengthening El Niño conditions; storage continues to expand even though according to the EIA there is only around 76 bcf of space remaining to fill; and industrial demand remains sluggish. Overall, momentum is down, but there is significant price support at $4/MMbtu, which means it may be tough for the December NYMEX contract price to fall below this level.”

Energy prices
The December contract for benchmark US sweet, light crudes gained 44¢ to $79.58/bbl Nov. 18 on NYMEX. The price of that contract, which expires at the close of trade Nov. 20, has increased more than 4% since hitting a 1-month low Nov. 13. The January contract rose 38¢ to $80.10/bbl. On the US spot market, WTI at Cushing was up 44¢ to $79.58/bbl. Heating oil for December dipped by 0.99¢ to $2.05/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month inched up 0.65¢ to $2.01/gal.

The December natural gas contract fell 27.6¢ to $4.25/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 28¢ to $3.71/MMbtu. “The fundamentals remain very weak,” said analysts with Raymond James & Associates Inc. in Houston. “After peaking at more than $5/Mcf in the middle of October (up 4% during the month), natural gas has since plummeted below $4.50/Mcf as expectations for a frigid winter begin to melt away. Storage levels are at an all-time high above 3.8 tcf, and it appears injections could continue through the end of November (typically the first month of withdrawal season). To make matters worse, supply continues to gradually roll over.”

In London, the January IPE contract for North Sea Brent crude was up 50¢ to $79.47/bbl. Gas oil for December gained $11.75 to $643/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 90¢ to $77.87/bbl.

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