MARKET WATCH: Energy prices fall as dollar strengthens

Energy prices fell amid low trading volumes Dec. 21 on the New York market as the January crude contract approached expiration and the US dollar hit a 3½-month high against the euro and a 6-week high against the yen.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 22 – Energy prices fell amid low trading volumes Dec. 21 on the New York market as the January crude contract approached expiration and the US dollar hit a 3½-month high against the euro and a 6-week high against the yen.

“Crude oil started yesterday's session in the green but ended the day down 1% as low trading volume helped amplify the day's volatility,” said analysts in the Houston office of Raymond James & Associates Inc. Traders shrugged off more bullish indicators, including attacks on Nigerian oil pipelines, massive snowfall in the eastern US, and a strong broader market.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “As we expected, in a period of low holiday-linked volume (yesterday volume was already low at 336,000 contracts about half the volume of last week), West Texas Intermediate was mainly driven by the dollar index.” He added, “WTI is currently trading about $2.70/bbl above its Euro correlation model, hence if the dollar index was to continue its advance higher and break the 78.145 resistance, we would think that it will be difficult for WTI to advance above $75/bbl given the state of the fundamentals that do not yet offer a convincing supportive picture.”

The natural gas market also posted early gains, but prices fell when traders encountered strong resistance at $5.93/MMbtu, Raymond James reported.

OPEC avoids action
As expected, members of the Organization of Petroleum Exporting Countries failed to make any official changes in production quotas Dec. 22 at a special meeting in Angola. “While compliance with quotas was strong this past spring and summer, the cartel's compliance rate fell to 58% of targeted production cuts in November as countries have looked to profit from higher oil prices,” Raymond James analysts said.

In a statement at the close of the meeting, OPEC officials said, “For the first time since the early 1980s, world oil demand has declined for the second successive year. Moreover, although asset market prices have rebounded and economic growth has resumed in some parts of the world, it is not yet clear how strong or durable the recovery might be. With the world still faced by shrinking industrial production, low private consumption, and high unemployment, the conference once again decided to maintain current oil production levels unchanged for the time being.”

OPEC members again called on non-OPEC producers to cooperate in restoring market equilibrium. The group’s next scheduled meeting is March 17 in Vienna.

OPEC’s calling for greater compliance by members with official production quotas is “as credible as China calling for lower carbon emissions [at the recent climate conference in Copenhagen],” said Jakob. Still, he said, “The only positive fundamental inputs of the day are the numbers for energy consumption in November coming out of China. Some of the overall growth is due to the low November 2008 base, but this still leaves China as one of the few countries with positive energy growth in 2009; it is not enough, however, to offset the demand declines in the rest of the world.”

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, “We are lowering our fourth-quarter earnings estimates for all of the [refining] companies in our coverage universe due to very weak refining margins and lower than expected crude oil differentials. We forecast all refiners we follow to lose money in the current quarter, with some of the losses very significant. Although refining margins have improved somewhat from the lows of November, we do not anticipate much upside in the near term due to overcapacity and seasonally weak demand.”

However, analysts at the Centre for Global Energy Studies, London, said, “The glitch in the global economic recovery caused by Dubai’s debt problems was largely smoothed over last week after Abu Dhabi agreed a $10 billion bailout of its neighbor. The news came as a welcome relief for global stock markets and returning confidence also had a part to play in strengthening the oil price. Certainly, the fact that the markets were able to digest such an unpleasant surprise is a good measure of how robust the recovery really is, but it is not enough to help persuade us that oil demand, or prices, will post significant gains next year, leaving the outlook still very mixed.”

They said, “US economic data are still improving. Industrial production in the states rose by 0.8% in November, above analysts’ expectations. This has yet to lead to a substantial draw in the country’s large middle distillate inventories, but it suggests the recovery in US oil demand might quicken in 2010. However, other economies have lost momentum, having initially seemed to be on the road to recovery. In contrast to the US, the Eurozone’s latest industrial figures for October show a decline of 0.6% month-on-month, undermining the optimism that had resulted from September’s small rise.”

In other news, the National Association of Realtors said home resales jumped 7.4% in November, far exceeding the expected 2.5% increase. Sales were 44% above a year ago and at the highest level in nearly 3 years. The increase was attributed to federal tax breaks that encouraged homebuyers.

Energy prices
The January contract for benchmark US sweet, light crudes fell 89¢ to $72.47/bbl Dec. 21 on the New York Mercantile Exchange. The February contract dropped 70¢ to $73.72/bbl. On the US spot market, WTI at Cushing, Okla., was down 89¢ to $72.47/bbl. Heating oil for January delivery declined 1.15¢ to $1.95/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 2.57¢ to $1.87/gal. The January contract for natural gas fell 11.3¢ to $5.67/MMbtu on NYMEX.

In London, the February IPE contract for North Sea Brent dropped 76¢ to $72.99/bbl. Gas oil for January gained $6.50 to $601.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased 10¢ to $71.88/bbl on Dec. 21.

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