MARKET WATCH: Oil falls past $68/bbl support; gas continues to rise

Crude futures smashed through the former $68/bbl price-support level to close below $66/bbl, while natural gas continued to rally against all fundamental market indicators.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 25 -- Crude futures smashed through the former $68/bbl price-support level to close below $66/bbl, while natural gas continued to rally against all fundamental market indicators.

“The oil-to-gas ratio has now fallen from a record-high of 30 earlier this month to 13 (using the November contracts),” said analysts in the Houston office of Raymond James & Associates Inc. “Oil fell another 4.5% yesterday and is now down over 8% the past 2 days as it settled at its 9-week low. While lackluster oil demand and the continued build in oil stockpiles are weighing on prices, the strengthening of the dollar as well as the decline in the broader market added to yesterday's weak sentiment. Natural gas remained volatile as usual, starting the day in negative territory and ended up 2.5%. This jump came after the Energy Information Administration reported a neutral injection of 67 bcf, bringing storage to 3.525 tcf (OGJ Online, Sept. 24, 2009).”

Raymond James analysts advised: “Keep in mind this is only 40 bcf from the all-time storage high recorded in October 2007. This morning, gas is bumping up against its 200-day moving average ($4.02) for the first time in over a year.”

In New Orleans, analysts at Pritchard Capital Partners LLC, said, “Some of the decline in crude was blamed on weaker US economic data—existing home sales fell 2.7% vs. the expected 2.1% increase. Surprisingly, the US dollar rallied on the weaker US economic data, a fairly strong indication that the direction of the dollar remains more important to the crude price than any other factor.”

Further, they said, “Comments made by Italian Prime Minister Silvio Berlusconi and Australian Prime Minister Kevin Rudd at the G-20 meeting in Pittsburgh urging the US to regulate or even ban speculation in raw materials also negatively impacted commodities and crude. Crude may or may not hold above the $66/bbl level, but the next support after $66 appears to be $62.”

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, “Crude oil prices have been dropping like a rock for the last 2 days, but this will do nothing to improve physical demand for it as the product cracks have not improved and the contango not widened either. Crude can either be refined or put into storage, but for now none of these options translate into a printed profit and that should slow down some of the marginal demand for crude oil. Better demand for oil products needs to quickly emerge; otherwise crude oil will be pushed backs towards the Organization of Petroleum Exporting Countries to force it to make further supply cuts.”

Jakob said, “We are much less confident than in previous weeks about the capacity of crude oil to regain its recent ranges [above $70/bbl].” He said, “Heating oil is holding the refining margins more than gasoline and would face a test of support at $1.65/gal about the same time as crude would face a test of support at $65/bbl.”

Some of the US demand recovery over the last 3 months was because of renewed industrial productivity. “There is still a big question mark as to whether there will be enough sustained demand in the US economy,” Jakob said. “The ‘cash-for-clunkers’ program helped US auto sales in July and August, but that is now over and, according to JD Power, September should print the lowest number of the year for US car sales (China on the other hand should print in September a new record high in car sales).”

Natural gas
Pritchard Capital Partners noted, “The United States Natural Gas Fund suspended issuing new shares on Aug. 12. On Sept. 11, the fund said it would start reissuing a limited number of shares on Sept. 28. Since the Sept. 11 announcement, natural gas has rallied from $3.25/Mcf to $3.95/Mcf. It is possible that the natural gas rally is due to traders positioning themselves ahead of the Sept. 28 date; however, the immediate front months of natural gas [on the New York Mercantile Exchange] suggest the rally could continue. October NYMEX natural gas closed at $3.95/Mcf and November NYMEX natural gas closed at $4.89/Mcf—the last trading day for the October NYMEX natural gas contract is Sept. 28. It would seem reasonable to expect this spread to contract dramatically and pretty quickly.”

Analysts at Energy Solutions Inc., Verona, Wis., said, “The natural gas price rally seems to have been prompted by a surge of speculative short-covering and not a change in the underlying fundamentals. The daily price volatility is the highest it’s been since the collapse of Amaranth Advisors in September 2006 [Amaranth Advisors LLC collapsed after losing $6 billion on natural gas futures in one of the largest hedge fund collapses in history].”

While economic data seems to point to better times ahead, at some point both the oil and gas markets will realize there is plenty of supply at to meet demand, said Energy Solutions analysts. “We believe that turning point where perception meets reality will occur at some point in the next 30-60 days. That means, we expect the upward momentum to continue for a while longer especially because the value of the US dollar has declined to 2009 lows against the euro, and that helps crude oil prices to move higher and because trading volumes are at near record levels probably because speculators have decided the time has come to cover their short positions.”

They acknowledged, “There is a lot of power and money in the market right now, and that needs to be respected, no matter how illogical you may think it is. The November 2009 natural gas NYMEX contract is likely to test $5.25 within the next 2 weeks, but ironically, that will also fulfill the expectations for the fourth quarter rally. Per our prior recommendations, buyers should have sufficient natural gas purchased through December 2009 to feel comfortable waiting out this rally. However, for those still in need of supplies for this period, we adjusted our buying targets last week. High risk buyers should remain on the sidelines for now as we believe their best opportunity for long-term buying will be in conjunction with the first quarter decline.”

Energy prices
The November contract for benchmark US light, sweet crudes fell $3.08 to $65.89/bbl Sept. 24 on NYMEX. The December contract dropped $3.13 to $66.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.18 to $65.79/bbl. Heating oil for October delivery declined 7.8¢ to $1.68/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month lost 6.83¢ to $1.64/gal.

The October contract for natural gas gained 9.5¢ to $3.96/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 12.5¢ to $3.59/MMbtu.

In London, the November IPE contract for North Sea Brent dropped $3.17 to $64.82/bbl. Gas oil for October fell $18.25 to $539.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost $2.75 to $65.12/bbl on Sept. 24.

Contact Sam Fletcher at samf@ogjonline.com.

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