MARKET WATCH: Crude price rebounds; warm weather deflates gas

Crude prices rebounded Jan. 19, ending a five-session losing streak in the New York market despite a stronger dollar, milder weather, and above-normal oil inventories. Natural gas prices fell, however.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 20 -- Crude prices rebounded Jan. 19, ending a five-session losing streak in the New York market despite a stronger dollar, milder weather, and above-normal oil inventories. Natural gas prices fell, however.

Early in the session, the front-month crude contract dropped to its lowest price since Dec. 24, 2009, as the euro fell to a 4-week low against the US dollar. But a pending Republican victory in the Massachusetts Senate race triggered purchases of health care shares that lifted the equity market and spilled over into the commodities market.

“Traders took their cues from a rally in the broader markets driven by optimism over strong earnings reports in the coming weeks,” said analysts in the Houston office of Raymond James & Associates Inc. However, they reported, “After gaining 2% yesterday, oil has reversed course and is trading lower this morning as the dollar has continued to strengthen over the past week, reaching its highest level vs. the euro since August.”

Gas was “flattish” in early trading Jan. 20 after declining 1% in the previous session, “as unseasonably mild weather continues to take the wind out of its sails,” Raymond James analysts said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The recent trend in relative values is continuing, with the heating oil crack moving further south and now trading at a discount to gasoline.”

Jakob reported, “Heating oil demand has been relatively weak during the cold spell, but we should not be surprised to see a higher number when the weather is actually warmer as demand is measured at the retail and not at the end-consumer level. The MasterCard [Spending Pulse] sales-at-the-pump numbers for last week shows a 3.2% week-on-week increase, with a big weather-related increase of 7.2% in New England. The 4-week average vs. last year is, however, within the recent range, at 1.2%. The weather in the US should stay above normal for the next 7 days, but a return towards normal is probable for the first week of February. At the start of February we will, however, start the countdown to the end of winter and with the current stocks of distillates a cold February can not be a real concern. Hence we would expect that a colder forecast for early February translates into greater support on natural gas than on heating oil.”

He said, “The other big change in relative values yesterday was the strong widening of the West Texas Intermediate premium to [North Sea] Brent, due to noticeable weakness of Brent. Freight rates have literally exploded since the start of the year, which will limit some of the arbitrage opportunities, but the weakness of Brent yesterday was also partly due to concern on the possible dehedging from the counterparties that are facing potential defaulting from Japan Air Lines due to its bankruptcy. We would, however, note that an airline being hedged at 80-90% of consumption does not necessarily mean that it is hedged on a flat price basis, and in the case of Japan Airlines we would expect that a sizeable part of the hedges were done using option collars and three-ways.”

In other news, Raymond James analysts said, “If there were any doubts that the Waxman-Markey energy and climate bill is in trouble, yesterday's election of Republican Scott Brown to the Senate from Massachusetts should put those doubts to rest. The Senate has always been the main challenge facing Waxman-Markey, given the GOP's total opposition to the bill's carbon cap-and-trade provisions, and the Democrats' loss of a 60-seat majority makes the hurdle that much higher. Furthermore, House moderates may also end up being a problem if the bill ultimately goes to a conference committee.”

They said, “The only realistic way of getting Waxman-Markey passed under current political conditions would be to remove cap-and-trade altogether, leaving the (relatively bipartisan) renewable power standard and a few minor provisions. This would follow precedent set in Australia, where much the same scenario played out last year in parliament. Either way, however, cap-and-trade now appears to be off the agenda in Washington for the foreseeable future.”

Energy prices
The February contract for benchmark US light, sweet crudes traded at $76.76-79.15/bbl Jan. 19 before closing at $79.02/bbl, up $1.02 for the day on the New York Mercantile Exchange. The March contract gained 95¢ to $79.32/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.02 to $79.02/bbl. Heating oil for February delivery dipped 0.06¢ but closed essentially unchanged at an averaged $2.05/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.37¢ to $2.06/gal.

The February natural gas contract dropped 13.4¢ to $5.56/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 15.5¢ to $5.52/MMbtu.

In London, the March IPE contract for North Sea Brent crude increased 53¢ to $77.63/bbl. Gas oil for February dropped $8 to $615.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 22¢ to $75.53/bbl on Jan. 19.

Contact Sam Fletcher at samf@ogjonline.com.

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