MARKET WATCH: Energy prices slip lower in 'flattish' market

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 29 -- Energy prices continued to slip Jan. 28, with crude trading “flattish” in the New York market after the Energy Information Administration said US oil demand over the past 4 weeks shrank 2% from year-ago levels.

Analysts in the Houston office of Raymond James & Associates Inc. said, “Natural gas fell 1.6% yesterday, though it notably did not react much to a bearish EIA [report of] withdrawal of 86 bcf” from US underground storage the previous week (OGJ Online, Jan. 28, 2010). Despite a stronger dollar, prices of both crude and gas rose in early trading Jan. 29.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said it’s possible even a strong recovery in global gross domestic product might be accompanied by a “fuel-less” or tepid resurgence in oil demand. “Oil demand growth in Asia is likely to be one of the most important drivers for the crude oil markets over the next few years. India and China are growing strongly as new car registrations have performed strongly,” he said.

Sieminski added, “Despite the drop in gas prices over the last week, the natural gas storage outlook has tightened considerably relative to consensus forecasts from a month ago. In our view, a return to colder weather could push gas prices back up as rapidly as they fell.”

Meanwhile, winter storm warnings were in effect Jan. 29 from New Mexico to North Carolina after heavy ice and snow toppled power lines and closed major highways in the south plains, including nearly all of Interstate 40 from the Texas-Oklahoma border to New Mexico. Nearly 142,000 homes and businesses in Oklahoma were without power.

US refining
US net exports of distillates were “on the high side” at 425,000 b/d during November, “which means that on a distillate yield of 27.3%, the US refineries are running about 1.6 million b/d of crude oil to export distillates,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Those are contra-economics, since these exports are sold into the floating stocks, which then pressure other Europeans refineries to reduce run as well. The bottom line is that the Atlantic Basin refineries were still burning about 1.6 million b/d too much crude oil in November.”

US refineries are taking a “double-whammy” from the low post-crisis demand and continued growth in ethanol blending that is taking market share from refined petroleum products, Jakob said. “The US is now producing about as much ethanol as it is importing crude oil from Saudi Arabia, and on the current trend we would expect the US ethanol production to be over the US import of Saudi crude oil in 2010,” he said. “This is good news from a perspective of US internal politics, but the growing use of ethanol in a peak oil demand environment (in the US) should continue to be a strong pressure point on the US refining system.”

He noted, “Saudi Arabia is not fighting the trend, and it is abandoning its storage installations in the Caribbean to focus instead on storage installations in Japan to better service ‘Chindia.’ With the 1 million b/d addition of Canadian pipeline capacity in the second quarter and the continued increase in ethanol production and blending, the US is cutting its dependency on oil that costs $5/bbl to produce (Middle East) and increasing its dependency on oil that cost $70/bbl to produce (Canada and ethanol).” Enbridge Inc. recently announced its Alberta Clipper pipeline from Canada to the Midwest will start operations in early April rather than in the third quarter as previously projected. “Combined with the start-up of the Keystone pipeline this means that we suddenly have 900,000 b/d of additional pipeline capacity from Canada to the US Midwest starting in the second quarter,” Jakob said (OGJ Online, Jan. 25, 2010).

Meanwhile, he said, “China is increasing its dependency on the cheap Middle-Eastern crude and would be shooting itself in the foot by allowing sanctions on Iran that would be too harsh and that would push Iran in a geopolitical escalation. France is taking over the rotating presidency of the [United Nations] Security Council this weekend, and there will be much more activity around sanctions against Iran starting next week, but we continue to believe that China will not allow more than cosmetic sanctions. The US Senate has approved new legislation that would target suppliers to Iran with interest in the US; it is, however, a unilateral act that will be a middleman dream.”

In other news, the US Department of Labor reported US wages and benefits rose just 0.5% in the last quarter of 2009 and were up only 1.5% for the whole year—the weakest performance since the government began keeping records in 1982.

Energy prices
The March contract for benchmark US light, sweet crudes dipped 3¢ to $73.64/bbl Jan. 27 on the New York Mercantile Exchange. The April contract declined 8¢ to $74.07/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 3¢ to $73.64/bbl. Heating oil for February delivery inched up 0.23¢ but closed virtually unchanged at an average $1.92/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 2.18¢, also closing at an average $1.92/gal.

The March natural gas contract dropped 8.6¢ to $5.14/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 14.5¢ to $5.28/MMbtu.

In London, the March IPE contract for North Sea Brent was down 11¢ to $72.13/bbl. Gas oil for February dropped $13.75 to $583.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost 47¢ to $71.40/bbl.

Contact Sam Fletcher at samf@ogjonline.com.