MARKET WATCH: Energy prices rise on OPEC’s inaction

Energy prices rose Dec. 22, with the new front-month February crude contract closing above $74/bbl in the highest settlement on the New York market since Dec. 4, after the Organization of Petroleum Exporting Countries agreed at its meeting in Angola to hold production quotas at 24.845 million b/d.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 23 – Energy prices rose Dec. 22, with the new front-month February crude contract closing above $74/bbl in the highest settlement on the New York market since Dec. 4, after the Organization of Petroleum Exporting Countries agreed at its meeting in Angola to hold production quotas at 24.845 million b/d.

“With the past 2 days seeing some of the lowest trading volumes since summer, crude rose 1% yesterday after the dollar trimmed its gains against the euro and OPEC announced it would hold its current quotas constant,” said analysts in the Houston office of Raymond James & Associates Inc. “With many traders home for the holidays, don't expect too great a reaction out of today's Department of Energy [US inventory] numbers (or any news through New Year's), which Wall Street is expecting to show a 2.6 million bbl total petroleum draw on cold weather across the Northeast. Similarly, natural gas posted slight gains yesterday off the colder weather and the strength in crude. Ahead of the [Dec. 23 New York market] open, both oil and gas were trading flattish.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The dollar index continues to firm and has broken the 78.145 resistance, and this pushes the next strong resistance at 79. On a Euro correlation basis, West Texas Intermediate would be valued at $70.30/bbl, hence when we consider that crude oil is overvalued vs. its currency correlation and that the risk for January is to see a reversal stock build in the US Gulf, we will be very hesitant in buying WTI at $75/bbl and above for the start of 2010.”

In other news, Raymond James analysts said, “The charged atmosphere in the Senate, exacerbated by the intense party-line fight over healthcare, is apparently damaging the already weak chances of the pending energy and climate bill (Waxman-Markey). A number of Republican moderates who have previously sounded amenable to a deal on cap-and-trade, including Lindsey Graham and Susan Collins, are now backing off, citing the acrimony over healthcare. Recall the bill barely passed the House in the summer, and getting 60 votes in the Senate looks like mission impossible for the Democrats. A plausible compromise could involve removing the cap-and-trade provisions, thus enabling the much less controversial renewable portfolio standard to pass.”

US inventories
The DOE’s Energy Information Administration said Dec. 23 commercial US crude inventories fell 4.9 million bbl to 327.5 million bbl in the week ended Dec. 18, surpassing the consensus among Wall Street analysts for a 1.6 million bbl decline. Gasoline stocks declined 900,000 bbl to 216.3 million bbl in the same period, counter to analysts’ expectations of a 1 million bbl build. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories dropped 3.1 million bbl to 161.3 million bbl, still above average for this time of year, said EIA. That surpassed Wall Street’s anticipated decline of 2 million bbl.

US imports of crude were down 65,000 b/d to 7.7 million b/d last week, said EIA officials. In the 4 weeks through Dec. 18, US crude imports averaged 8 million b/d, down 1.6 million b/d from the comparable 4-week period last year.

The input of crude into US refineries dipped 27,000 b/d to 13.8 million b/d in the latest week, with units operating at 80% of capacity. Gasoline production decreased to 9 million b/d, while distillate fuel production increased to 3.8 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, “The EIA's regional data showed a sharp decline to East Coast distillate inventories due to low supply (66% utilization rate) and increased distillate demand (most likely for heating oil). If this trend continues, it should help support refining margins in the region.” He also noted, “Utilization rates increased on the West Coast (from 74% to 76% week-over-week), which could be a sign that improved gasoline margins in the region are attracting more supply. This could potentially result in lower margins on the West Coast.”

Rousseau added, “Refined product inventories fell sharply for the second consecutive week due to low production levels and seasonally rising distillate demand. While we view this data as positive, it is important to remember that refiners are operating well below capacity and could easily ramp up production if refining margins improve materially. We continue to expect very weak fourth quarter earnings for the refiners.” Soleil-Back Bay Research earlier lowered fourth quarter and 2010 earnings estimates for all of the integrated oil companies it covers “due to reduced crude oil and refining margin forecasts, partially offset by higher natural gas price assumptions.”

The American Petroleum Institute reported Dec. 22 US crude inventories were down 3.7 million bbl to 328.8 million bbl, with gasoline stocks down 1.1 million bbl to 215.9 million bbl. It said distillate fuel inventories increased by 31,000 bbl to 3.8 million bbl.

Of the 3.7 million bbl crude stock draw reported by API, Jakob said 2.3 million bbl were in the discounted West Coast district, the prime region for divergence between the API and the EIA numbers. “There was a 1.5 million bbl build in the Midwest, but there the API is doing some catch-up to the DOE, and the API is indicating unchanged stocks [down 119,000 bbl] in Cushing, Okla. Crude stocks in the US Gulf were reduced by 2.73 million bbl, but since this is catching up to [earlier] DOE levels, we can not be sure that such a stock reduction will be repeated in the [latest] DOE report,” he said prior to the release of the EIA numbers.

“The US Gulf crude oil stock reduction is so far this month exactly the same as last year (down 11.8 million bbl) and the absolute levels of stocks in the US Gulf are also exactly the same as last year. Given that part of that stock reduction is probably linked to tax optimization, which is then followed by a strong build of stocks in January (last year a build of 19 million bbl), we would rather use any DOE rallies in a thin market this week and next as a selling opportunity for January both on flat price and on the spreads which have been severely reduced below full-carry economics for Cushing,” Jakob said.

Energy prices
The new front-month February contract for benchmark US light, sweet crudes gained 68¢ to $74.40/bbl Dec. 22 on the New York Mercantile Exchange. The March contract increased 51¢ to $75.06/bbl. Spot market prices for WTI at Cushing were unavailable. Heating oil for January delivery dipped 0.34¢ but closed virtually unchanged at an average $1.95/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.97¢ to $1.89/gal.

The January contract for natural gas advanced 4.6¢ to $5.72/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 18.5¢ to $5.58/MMbtu.

In London, the February IPE contract for North Sea Brent was up 47¢ to $73.46/bbl. Gas oil for January fell $15 to $586.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dropped 56¢ to $71.32/bbl on Dec. 22. OPEC’s Vienna headquarters will be closed Dec. 24-25. The New York market will be closed Dec. 25 and Jan. 1.

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