MARKET WATCH: Oil prices decline; gas prices rise

Crude prices fell for the third consecutive session Jan. 22 in the New York market following a sharp downturn in the equities market, but natural gas increased more than 3% on forecasts of colder weather.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 25 -- Crude prices fell for the third consecutive session Jan. 22 in the New York market following a sharp downturn in the equities market, but natural gas increased more than 3% on forecasts of colder weather.

Oil prices “nosedived at the tail end of the week, falling over 2%…to reach one-month lows,” said analysts in the Houston office of Raymond James & Associates Inc. “While a strengthening dollar and the weak broader market were the primary culprits behind crude's decline, oil is trading relatively flat this morning as the dollar's rally appears to have been short-lived,” they said.

Most of the world main markets were down “in sympathy” with the Standard & Poor's 500 stock index, which “had its worse week since the start of last year’s March rally,” down 3.9% for the day and down 2.09% year-to-date, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Natural gas prices also were down in early trading Jan. 25 despite the National Weather Service's prediction for temperatures to fall below normal levels across much of the country during the first week of February, Raymond James analysts reported.

Chinese market
Meanwhile, the Chinese government’s efforts to cool down its fast-growing economy are not a bearish signal to the oil market, said Raymond James analysts. “On the contrary: It is a remarkable testament to the resilience of the Chinese economy that, barely a year after a global economic meltdown, Chinese gross domestic product is growing north of 10%. We therefore see the oil market's sell-off in response to this news from China as a textbook overreaction.”

They said, “The bigger picture here is that, under any plausible scenario, China will continue to be the world's No. 1 driver of oil demand—the inevitable consequence of the country's urbanization, industrialization, and creation of a consumer society. Concurrently, China's domestic oil production is close to peaking. As Chinese oil imports approach 5 million b/d—up threefold in a decade—the Chinese government is in the process of building out a sizable strategic petroleum reserve. While the amount of incremental oil demand this generates is a drop in the bucket relative to China's overall level of demand, there is a broader significance here. Along with China's growing tendency to pursue oil resources internationally, the SPR build-out certainly implies that China is bullish on long-term oil prices (as are we, of course), and thus wants to control resources in order to hedge its growing dependence on oil imports.”

Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, London, said, “Recovery in China has been a key impetus for oil prices in 2010…. We have said many times that oil demand growth in the west is moribund and that the Far East and Middle East and South Asia will be the drivers for rises in actual oil demand in 2010.”

They said, “China's apparent oil demand—admittedly always a shaky indicator—was up 15% in December from a year earlier as the country's stimulus package boosted the economy and refiners upped runs to a record 8.1 million b/d, up nearly a quarter from a year earlier. Not all of that has been in response to domestic demand. Inventories have risen and the country's gasoline exports hit their highest in years despite recent strong growth in car sales. Despite that, although the year-on-year demand figure is against a weak base, as oil demand was shrinking because of the economic crisis, this was the ninth consecutive monthly rise suggesting oil demand growth is sustained.”

China's National Energy Administration said demand for gasoline, diesel, and kerosene would grow by 4% this year.

Waterway shut down
Some 11,000 bbl of crude spilled into the Sabine Neches Waterway Jan. 23 on the Texas Gulf Coast, closing the waterway to four refineries. It is “one of the biggest US oil spills since Exxon-Valdez, though it is currently being contained and is nowhere near the size of the infamous 1989 ecological disaster,” Raymond James analysts said. Other sources said it’s the worse incident in Texas in more than 20 years.

The spill occurred after the tanker Eagle Otome bound for ExxonMobil’s refinery in nearby Beaumont lost power and collided with a barge that pierced the ship’s double hull. The Coast Guard reported most of the spilled crude has been contained and is being cleaned up. But officials estimate the waterway may remain closed to vessel traffic for the next 5 days, shutting off waterway access to four area refineries that process 6.5% of total US capacity. The refineries are run by ExxonMobil, Valero Energy Corp., Royal Dutch Shell PLC, and Total SA though an overhang in supply and an extensive pipeline network in the area should alleviate any refinery supply problems.

Jakob said, “Last week, the Houston ship channel suffered as well some delays due to fog. We should therefore expect to see some slowdown in the rate of stock builds in the US gulf for the two next weekly reports, but those are temporary delays and should be fully expected by the market.”

Turning to other issues, Jakob said, “President Obama’s move against the banking sector will be presented as a populist act, but we do not think that it is. First we need to keep in mind that in early January the Bank of International Settlements (Basel, Switzerland), which is not a political organization, held a meeting of the world’s central bankers and of representatives of the main investment banks to address the concerns that financial firms are returning to the aggressive risk-taking of the precrisis. The BIS has access to more data than what we have, but from the available data it is quite clear that the banks are still hoarding the cash that they have received (cash held by US banks is even higher than in the scary start of 2009 and close to $1 trillion higher than in 2008) while commercial and industrial lending continues to drift lower. There are growing concerns about a bubble having replaced a burst bubble; in theory to address that the central banks should be raising interest rates, but if the economy is too fragile to support an increase in rates and if the banks are hoarding the cash rather than making loans, then there are little solutions but to push for a real reform on the structure of the financial system and the role of some investment banks in that system.”

He said, “The equity rally in the second half of 2009 has been done under very light volume. The expected tsunami of cash going back into the market has not materialized as private investors continue to distrust the system. The administration could not tackle a reform of the banking system in early 2009, but now that there is potentially a bubble to address and investment cash on the sideline, the timing would allow a market correction (on anxiety over position liquidation from some funds) as it is likely to be met by some bottom picking by the sidelined cash. In that sense we would not expect to revisit the systemic risk levels of end 2008-early 2009. However, more specifically to commodities we will price a risk of position liquidation in the last quarter of the year on the Commodity Futures Trading Commission position limit risk.”

KBC analysts noted, “ConocoPhillips joined Total, Shell, and Chevron in announcing sweeping changes in their organizational structure. The company is setting up a global trading organization based in London, while supply operations will be handled from its Houston office. The relocation of the trading operation probably reflects the company's desire to become a global player in a world where consumption is increasingly led by growth in emerging markets, although cynics believe that increasing regulation in the US markets may have tipped the scales in favor of an overseas location.”

Energy prices
The March contract for benchmark US light, sweet crudes dropped $1.54 to $74.54/bbl Jan. 22 on the New York Mercantile Exchange. The April contract fell $1.61 to $74.92/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.32 to $74.54/bbl, bringing it back in alignment with the front-month futures contract. Heating oil for February delivery lost 4.4¢ to $1.94/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.72¢ to $1.97/gal.

The February natural gas contract continued to climb, up 20.4¢ to $5.82/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 15¢ to $5.68/MMbtu.

In London, the March IPE contract for North Sea Brent crude dropped $1.75 to $72.83/bbl. Gas oil for February fell $14.75 to $597.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $1.52 to $73.02/bbl on Jan. 22. So far this year, OPEC’s basket price has averaged $77.47/bbl, up from $61.06/bbl from all of 2009.

Contact Sam Fletcher at samf@ogjonline.com.

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