MARKET WATCH: Gas tops $5/MMbtu; oil ends rally

The front-month natural gas contract shot above $5/MMbtu to a 9-month high Oct. 20 amid cold weather forecasts while crude declined, ending an eight-session rally as a disappointing housing report sucked the confidence out of the equities market—but not before topping $80/bbl in overnight electronic trading in the New York.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 21 -- The front-month natural gas contract shot above $5/MMbtu to a 9-month high Oct. 20 amid cold weather forecasts while crude declined, ending an eight-session rally as a disappointing housing report sucked the confidence out of the equities market—but not before topping $80/bbl in overnight electronic trading in the New York.

In New Orleans, analysts at Pritchard Capital Partners LLC listed other reasons for the jump in oil prices, including:

• Caterpillar Inc.’s improved earnings outlook was taken as further evidence the economy and industrial demand is improving.

• Comments from Devon Energy Corp.’s chief executive that a market price above $6/Mcf is needed to sustain US production. “The CEO of Chesapeake Energy Corp. made similar comments 2 weeks ago,” the analysts said.

• Hope that a congressional caucus on natural gas may pave the way for pronatural gas legislation on the heels of a report from the National Academy of Sciences that burning coal to generate electricity in the US causes $62 billion/year in hidden costs for environmental damage vs. natural gas plants that produce $740 million in aggregate damages.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. said, “The correlation between crude and the dollar continues to hold strong, with the appreciation against the euro further pressuring oil prices yesterday.” Both oil and gas prices were down in early trading Oct. 21.

Pritchard Capital Partners said, “The dollar strengthened in response to the Brazilian government imposing a 2% tax on all foreign purchases of Brazilian fixed-income securities and equities. The Brazilian government imposed the tax in hopes that it would halt gains in the Brazilian real, which has appreciated more than any other major currency in 2009. The tax measure is not positive for the Brazilian market, but it does not change the fact that the Brazilian economy is commodity based and is forecasted to have much higher economic growth than the developed world; however, any measures that strengthen the US dollar tend to lead to commodity weakness, and the Brazilian tax is no exception.”

In other news, Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “Discussions continue in Vienna over the Iran nuclear enrichment program. The process stalled yesterday as Iran wanted to avoid dealing directly with France, but a face-saving solution is apparently in the process and could make for some positive (bearish crude on lower geopolitical premium) headlines.”

In Nigeria the press officer of “what is left of” the militant Movement for the Emancipation of the Niger Delta (MEND) is “backing down, now claiming that they are satisfied with the current [amnesty] environment, asking ‘fighters to stand down from their level of alert’ and may require a formal declaration of ceasefire,” Jakob said. “There was anyway great doubt that any fighters were left in the MEND apart from the press officer, and any geopolitical premium on [crude prices because of] Nigeria should be further reduced,” he said.

US inventories
The Energy Information Administration said Oct. 21 commercial US inventories of crude increased by 1.3 million bbl to 339.1 million bbl. That’s a little lower than the 1.5 million bbl consensus among Wall Street analysts and down from the bearish build of 2.2 million bbl reported earlier by the American Petroleum Institute. EIA said gasoline stocks in the same period fell 2.3 million bbl to 206.9 million bbl, exceeding a consensus for only a 900,000 bbl draw. Distillate fuel inventories decreased by 800,000 bbl to 169.9 million bbl compared with expectations of a 1 million bbl decline.

Imports of crude into the US dipped 32,000 b/d to 8.7 million b/d last week. In the latest 4-week period crude imports have been down 310,000 b/d below the same period in 2008. Input of crude into US refineries declined 27,000 b/d to 14.1 million b/d last week with units operating at 81.1% of capacity. Gasoline production was virtually unchanged at 8.5 million b/d, but distillate fuel production increased slightly to 3.9 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Refined product inventories (gasoline plus distillate plus jet fuel) fell 3.3 million bbl (0.8%) last week due to lower supply. Refiners continued to operate at very low levels because of weak refining margins, and imports fell to their lowest level of the year. After showing signs of improvement the last 3 weeks, gasoline demand dropped to under 9 million b/d, according to the EIA. Inventories of distillate remain very high heading into winter. We forecast that weak earnings will continue in the refining sector into 2010.”

Energy prices
The November contract for benchmark US light, sweet crudes hit a 12-month high of $80.05/bbl in overnight electronic trading Oct. 20 before closing at $79.09/bbl, down 52¢ for the day on the New York Mercantile Exchange. The December contract dropped 84¢ to $79.12/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 52¢ to $79.09/bbl. Heating oil for November delivery slipped 0.49¢, but its closing price was virtually unchanged at an average $2.05/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month inched up 0.05¢, but the contract price was virtually unchanged at an average $1.99/gal at closing.

The November natural gas contract jumped 32.6¢ to $5.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 36¢ to $4.60/MMbtu.

In London, the December IPE contract for North Sea Brent crude lost 53¢ to $77.24/bbl. Gas oil for November climbed $4.50 to $637.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 93¢ to $75.82/bbl Oct. 20.

Contact Sam Fletcher at samf@ogjonline.com.

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