MARKET WATCH: Energy prices gain; Goldman Sachs expects $100/bbl crude

Energy prices escalated Dec. 13 after oil ministers of the Organization of Petroleum Exporting Countries decided at their Dec. 11 meeting in Quito, Ecuador, to maintain official production quotas at a total 24.9 million b/d although members actually are producing closer to 29 million b/d.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 14 -- Energy prices escalated Dec. 13 after oil ministers of the Organization of Petroleum Exporting Countries decided at their Dec. 11 meeting in Quito, Ecuador, to maintain official production quotas at a total 24.9 million b/d although members actually are producing closer to 29 million b/d.

Goldman Sachs Group Inc., known for assessments beyond Wall Street consensus, said continued OPEC overproduction will reduce the group’s spare production capacity and may push crude prices above $100/bbl in the second half of 2011.

A Bloomberg report said OPEC members (other than Iraq) produced a total 26.7 million b/d in November, with Nigeria, Iran, and Angola as the largest overproducers.

On Dec. 13 in the New York market, crude peaked almost 2% higher before closing with gains of 0.9%, “fueled by data points from China which revealed that oil demand rose more than expected in November,” said analysts in the Houston office of Raymond James & Associates Inc. “Mixed weather forecasts throughout the US kept gas prices flat.” However, both oil and gas prices were down in early trading Dec. 14.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said the term structure for North Sea Brent weakened while West Texas Intermediate’s term structure remained unchanged. The time spread on WTI between the first and last months of 2011 increased from “a mere 30¢/bbl” on Dec. 6 to $1.01/bbl Dec. 13.

“The shift is consistent with our views…that the strengthening in the term structure last week was over-done,” said Zhang. “Product cracks generally weakened yesterday as products failed to keep up with crude. The sharp increase of refinery runs in both China and the US has damped the bullish sentiments in production cracks and refinery margins.”

He said, “We see a shift of crude inventory to product inventory as a result of relatively strong US refinery margins and the end of the maintenance season.”

Zhang added, “On the financial market, the dollar index lost almost 1%…. Equity markets mostly moved up, led by the Shanghai market. US treasury yield weakened slightly after the recent strong rally while euro-zone government bond yields edged slightly higher yesterday.”

The US dollar declined 1.3% against the euro on Dec. 13. “The dollar index came under some significant selling,” said Olivier Jakob at Petromatrix, Zug, Switzerland, “and while this will result in the usual comments that oil is rising because of weakness in the dollar index, we have to point out that the reality of the numbers show that the oil correlation to the dollar has been totally broken down (it’s actually now negative) since November.” Jakob said, “What correlation there is still left is between oil and equities, and which one is leading which one in this correlation can be debated.”

Jakob noted an announcement Valero Energy Corp. has started to bring its 275,000 b/d Aruba refinery back on stream after an 18-month economic shutdown. “That is the main difference [compared] with 2008: There is spare capacity in the oil system both on the downstream and the upstream. In view of the gasoline markets for next summer, we should also keep in mind that the 200,000 b/d Delaware refinery is expected to come back to service in the second quarter. The refinery economics have been relatively healthy and while refining capacity coming back on stream will burn more crude oil, it will also produce more products. Hence the challenge now will be to have product demand strong enough despite $3/gal gasoline, record unemployment, increasing mortgage rates, European austerity, etc.; this when stocks are still seasonally close to the top.”

He said, “During November, the gasoline supply and demand was tight due to the refinery maintenance on the East Coast and cracks exploded while the time spreads went into a significant backwardation. That has eased now. It is winter, the time for heating oil demand, and the contango on ICE gas oil is widening, not narrowing. With a heavy schedule of new-build tankers being prime candidates for floating storage, we will have to watch for the floating storage economics to redevelop if the front contango on ICE gas oil starts to spill into the following months.”

Energy prices
The January contract for benchmark US sweet, light crudes gained 82¢ to $88.61/bbl Dec. 13 on the New York Mercantile Exchange. The February contract escalated 83¢ to $89.14/bbl. On the US spot market, WTI at Cushing, Okla., was up 82¢ to $88.61/bbl, in step with the front-month futures price. Heating oil for January delivery inched up 0.77¢ to $2.47/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 0.91¢ to $2.32/gal.

The January natural gas contract rose 0.3¢ to $4.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 9.5¢ to $4.46/MMbtu.

In London, the January IPE contract for North Sea Brent crude was up 71¢ to $91.19/bbl. The new front-month January gas oil contract gained $6 to $767/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 31¢ to $87.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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