MARKET WATCH: Crude price climbs slightly

Crude prices rose slightly Jan. 8 in the New York Mercantile Exchange and continued to climb in early trading Jan. 11 as the dollar declined against the euro.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 11 -- Crude prices rose slightly Jan. 8 in the New York Mercantile Exchange and continued to climb in early trading Jan. 11 as the dollar declined against the euro.

However, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The correlation trade between oil and the dollar that was relatively strong throughout 2009 was completely broken down in the second half of December as large speculators have been increasing net length both on West Texas Intermediate and on the dollar index. The gap between the market value of WTI and its euro correlated value remains very wide, about $10/bbl.”

On the basis of a barrel of North Sea Brent priced in euros, he said, “Crude oil is back to the highs of 2006 and 2007, and we have no historical evidence that the economy is able to be sustained at such high level of energy costs. Of course, the price of oil surged to higher levels in the first half of 2008, but we have to keep in mind that vehicle miles driven started to decline in 2007 and not in 2008, and what followed the oil price surge of 2008 was the mother of all recessions. The economy of 2007 did not manage to digest current oil prices, and we will remain cautious in assuming that the subsidized economy of 2010 will be able to do so. The 2009 stabilization of the economy was done with oil at $60/bbl, not with oil at $90/bbl.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, London, analysts said, “If prices continue to rise next week, it will be tempting to conclude that we are back in the casino-like oil market conditions we saw in 2008.” They reported, “The latest weekly data from the Commodity Futures Trading Commission…shows that in the run-up to the end of the year a wave of money has moved into oil. There is no reason for this other than a belief that the medium and long term direction for oil is up. Even this long cherished—and valid—belief is under threat because of the damage to world oil demand from the recession and the prospects of rising oil production from Iraq and elsewhere that will probably offset falling output from other countries, at least for this decade. Add in an existing 7 million b/d of spare production capacity available today and it is very difficult to see a supply problem inside the next 5 years.”

Market factors
The price of crude initially slumped Jan. 8 after the US Department of Labor reported 85,000 layoffs in December against a general consensus of no job losses or gains. But the market later rebounded. Meanwhile, a study by the Associate Press showed the surge of spending on US roads and bridges under the first federal economic stimulus plan barely helped the construction industry and had no effect at all on local unemployment, which rose or fell regardless of federal spending.

“The much-awaited unemployment numbers came out worse then expected (many were expecting a positive number for December), and while it is true that the monthly unemployment additions are much lower than in the end of 2008,…we are still left with a number of unemployment which is more than double the levels of December 2007,” Jakob said.

A report showing Chinese oil imports jumped 17.7% year-over-year in December helped lift crude prices at the end of last week. China imported 5 million b/d of crude in December—“a record high and about 2 million b/d higher than the depressed levels of January-February 2009,” Jakob said. “It remains to be seen if these levels can be sustained, but at face value they will be a supportive line. On the flip side, China in December has turned for the first time into a net exporter of petroleum products. For the whole of 2009, Chinese imports of petroleum products were down 5.4% while exports of petroleum products were up 46.3%. The US has been importing crude oil to export distillate; China is importing crude oil to export products.”

He added, “Refinery runs on a global basis have been subsidized in 2009 by the building of floating stocks, and the challenge for 2010 is whether there will be enough internal (real) demand to replace the subsidized (floating stocks) demand of 2009.”

Jakob reported, “Refining margins were mainly supported by the gasoline crack that made strong gains during the week (about $1/bbl) as the cold temperatures made for a series of glitches in FCC units. The heating oil crack on the other hand was under pressure for most of the week but made strong gains in the last 30 min of trade on Jan. 8 due to a fire at the Come-By-Chance refinery, and given that the fire was in the Isomax unit it should have an impact on the naphtha stream but as well on the kerosene and diesel streams.”

Jakob noted, “Weather-wise, the last 10 days have been harsh on both sides of the Atlantic, but the cold has been accompanied by above-normal snowfalls and if heating oil demand will have risen, demand for transportation fuels should have come down as travel as been hard hit. Salt is becoming a very scare commodity in Europe.”

KBC analysts said, “It is notoriously difficult to forecast how much extra demand is created by a spell of cold weather because not only must you factor in extra heating oil demand but also transport fuel demand inevitably falls because nobody can move around. A good guide from history is that a net boost to oil demand of about 600,000 b/d could be in the cards. But the bad weather can’t possibly last long enough to seriously deplete the massive stockpile of gasoil and diesel that, as far as heating grades are concerned, could probably cope with two bad winters.”

The National Weather Service predicts above-normal temperatures in the Northeast and Midwest US Jan. 18-24.

Separately, there was a bomb attack on a 20,000 b/d Chevron pipeline in Nigeria over the weekend, but that apparently was local sabotage following the shooting of two local youths “and should not be interpreted as a return to militancy action,” said Jakob. Also over the weekend, Enbridge Inc. shut in a 440,000 b/d oil pipeline from Canada to the US Midwest because of a leak in North Dakota.

In other news, analysts in the Houston office of Raymond James & Associates Inc. said growing sales of hybrid vehicles will have “virtually zero” effect on US and global oil demand in the next 3-5 years. “By 2020, under the most aggressive sales growth scenario we can envision, hybrids wouldn't even offset 1% of global oil demand—a drop in the bucket. Simply put, the internal combustion engine isn't going anywhere, and when we look ahead long term, we remain firmly bullish on oil prices,” they said.

Energy prices
The February contract for benchmark US light, sweet crudes traded at $81.80-83.47 before closing at $82.75/bbl, up 9¢ for the day Jan. 8 on NYMEX. The March contract increased 11¢ to $83.30/bbl. On the US spot market, WTI at Cushing, Okla., was up 9¢ to $82.75/bbl. Heating oil for February delivery increased 1.67¢ to $2.20/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 2.04¢ to $2.16/gal.

The February natural gas contract dropped 5.7¢ to $5.75/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 89.5¢ to $6.48/MMbtu.

In London, the February IPE contract for North Sea Brent lost 14¢ to $81.37/bbl. Gas oil for January dropped $4 to $656.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 25¢ to $79.94/bbl on Jan. 8. Through that date, OPEC’s 2010 basket price averaged $79.44/bbl, compared with an average $61.06/bbl for all of 2009.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets