MARKET WATCH: Crude market continues losing streak

Crude prices continued falling for the ninth consecutive session in the commodity’s longest losing streak since July 2001—down 0.5% Dec. 14 on the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 15 -- Crude prices continued falling for the ninth consecutive session in the commodity’s longest losing streak since July 2001—down 0.5% Dec. 14 on the New York market.

“The drop in crude ignored the dollar's fall and looked straight to Cushing[, Okla., crude] stocks, which have risen for 6 straight weeks,” said analysts in the Houston office of Raymond James & Associates Inc. “Meanwhile, the contango between the January and February contracts continues to expand, widening to $2.39/bbl on Monday—its highest since April. Natural gas rose 3.3%—its highest close in 11 months—as cold weather forecasts for the next 2 weeks should support demand.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Oil markets are in a standstill, waiting for the outcome of the Federal Reserve board meeting and of the weekly Department of Energy statistics [on US inventories of crude and petroleum products, both scheduled Dec. 16], and in that environment the main feature yesterday was the West Texas Intermediate contango continuing to show its ugly face.”

Jakob said: “At the current economics we would expect to see further builds in Cushing while the stock outlook for the US Gulf will be more uncertain given that there was last week some delays in the Houston Ship Channel due to bad weather. The problem remains that with weather delays [continuing through this week] and anticipation of end-of-the-year tax plays, crude oil stock draws in the US Gulf this time of the year tend to be discounted. The two-tier market between the US Gulf and Cushing is not likely to end soon, and Kuwait is following the steps of Saudi Arabia to price its exports to the US on the Argus Media Ltd.'s Argus Sour Crude Index (ASCI) quote rather than WTI. The open interest on the US Gulf futures is, however, still immaterial, and volume is not yet flowing to the new New York Mercantile Exchange contract.”

Jakob said, “The contango is a big weight on crude oil flat price, and the slide in price would probably be greater if it was not for the concern that we start 2010 with another ‘Iranium’ trading theme. To make sure that everybody has the right focus, the Pentagon will in January test for the first time is missile defense system against an Iranian nuclear attack (it will try to intercept a mock missile fired from the Marshall Islands). In the meantime, a meeting on Iran that was scheduled for Friday was postponed due to ‘scheduling difficulties’ from China.”

Raymond James analysts reported, “E&P stocks ran hard Monday, with takeover targets pointing fingers as to who would cash in next after ExxonMobil Corp. announced the acquisition of shale-gas focused XTO Energy Inc. The XTO acquisition—the largest pure play E&P deal in US history, surpassing ConocoPhillips's $35 billion purchase of Burlington Resources in 2005—was an all-stock transaction valued at $41 billion (including debt), a 25% premium for XTO holders.” The Standard & Poor's 1500 Oil & Gas Exploration & Production subindustry index gained 6% and handily outperformed the Oil Service Index (up 1.5%), Dow Jones Industrial Average (up 0.3%), and S&P 500 index (up 0.7%), “which all benefitted from optimism around the news,” they said.

In other news, analysts at the Centre for Global Energy Studies, London, said, “Since governments first began to roll out their stimulus programs last winter, serious questions have been posed about what will happen when the effect of this ‘sugar rush’ begins to diminish. Allied to this, though, there are also widespread concerns about the increasing debt Organization for Economic Cooperation and Development countries have incurred as a consequence of these fiscal stimuli, debt levels that were already high from years of government profligacy and, more recently, falling tax revenues. Indeed, several developments over the past week or so have heightened anxiety about how such a debt mountain could undermine the economic recovery.”

They said, “Japan is a case in point. The Japanese government has not only been forced to reduce drastically its estimate of third-quarter gross domestic product growth to 1.3% from 4.8% previously, but it has also decided to roll out another $81 billion stimulus program—perhaps partly due to fears that even the third quarter’s weaker GDP figure is largely due to inventory restocking. For a country that has a shrinking workforce and where tax revenue declined by 24% in the first half of 2009, there is a real risk that mounting government debt will destroy the prospects of a return to real growth, particularly if it leads to a rise in interest rates. Elsewhere, US President Barack Obama has decided to divert $200 billion from the Troubled Asset Relief Program (TARP) fund [established to purchase assets and equity from troubled financial institutions] to help stimulate US employment, much to the chagrin of his opponents, who say it should be used to reduce the ballooning federal deficit.”

CGES analysts reported, “The UK’s prebudget report, delivered last week, also contained precious little to convince buyers of UK government bonds that the country’s dire financial situation will improve in the near term, offering only meager tax rises and containing no real plan to cut government spending. In the case of the US and UK, there may be expedient political reasons for their economic policies, but the failure to address the debt problem fully still looms large. When these macroeconomic concerns are married to the oil market’s weak fundamentals, the fact that the WTI price has fallen roughly 10% over the last 10 days is understandable. In our view, it is still unlikely that there will be any further major price falls between now and the New Year, but the outlook for oil demand next year is becoming increasingly troubling and is not supportive of the run-up in oil prices that the forward curve suggests.”

Energy prices
The January contract for benchmark US sweet, light crudes dropped 36¢ to $69.51/bbl Dec. 14 on NYMEX. The February contract declined 9¢ to $71.86/bbl. On the US spot market, WTI at Cushing, Okla., was down 36¢ to $69.51/bbl. Heating oil for January delivery dipped 0.03¢ but closed virtually unchanged at an average $1.91/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 1.49¢ to $1.83/gal.

The January contract for natural gas rose 16.9¢ to $5.33/MMbtu Dec. 14 on NYMEX, wiping out the loss from the previous session. On the spot market, gas at Henry Hub, La., continued to climb, up 12.5¢ to $5.40/MMbtu.

In London, the January IPE contract for North Sea Brent increased 1¢ to $71.89/bbl. Gas oil for January gained $6.25 to $588.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 21¢ to $70.64/bbl Dec. 14.

Contact Sam Fletcher at samf@ogjonline.com.

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