MARKET WATCH: Gas falls below $5/MMbtu; crude tops $80/bbl

The front-month natural gas contract dropped below $5/MMbtu to an 11-week low Feb. 22 in the New York market as winter nears its end, but the crude oil price climbed above $80/bbl to its highest level in almost 6 weeks.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 23 -- The front-month natural gas contract dropped below $5/MMbtu to an 11-week low Feb. 22 in the New York market as winter nears its end, but the crude oil price climbed above $80/bbl to its highest level in almost 6 weeks.

“Crude was lifted 0.4% yesterday in its fifth straight session of gains as refinery workers at French major Total SA continued their sixth day of striking amidst labor concerns,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude was also propped up by news that Iran may begin construction this year on 2 of 10 potential nuclear enrichment plants.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Crude oil spent the day in a very narrow range, the main market dynamic being the continued strength in the gasoline crack on the expectation of an extension of the French workers strike against the refining sector. There is a high-risk concentration on this single event, and when and if the strike is called off, there will be a high risk of a sharp correction in gasoline.”

Company and union leaders continued negotiations Feb. 23, “and it is likely that the French government is accentuating the pressure for a way out of the crisis,” said Jakob. The “main trading input of the day” will be whether the strike continues, he said. Total’s 6 refineries and 12 product depots in France were hit by labor strikes supporting workers’ Feb. 16 takeover of the company’s idle 137,000-b/d Dunkirk refinery (OGJ Online, Feb. 17, 2010).

Atlantic Basin impacted
“On a more general note,” Jakob said, “it is very well and trendy wanting to run cars on sugar, corn, and soybeans, but politicians should also have the guts to explain that there is a social cost for wanting to reduce dependency on oil, and that is that some refineries in the Atlantic Basin need to close and that some workers in the refinery industry will necessarily lose their jobs.”

Refineries in the Atlantic Basin “are not only suffering from the increased market share of biofuels but as well from the increasing imports of refined products originating from the new refineries in Asia. The Atlantic Basin is trying to shy away from Iranian oil but in the end that crude oil is being refined at a discount in Asia, and the products sent to Atlantic Basin where they are forcing refineries into permanent shutdowns on both sides of the Atlantic. Not surprisingly, China continues to call for ‘dialogue’ over the issue of Iranian enrichment of uranium,” said Jakob.

He also pointed out, “Tunisia was forced over the weekend to increase the domestic oil prices (first increase in 12 months) as it can not cope anymore with the subsidies; Cathay Pacific and Singapore Airlines are increasing fuel surcharges; what is left of Japan Airlines is doing the same; Air India is asking for delayed payments on its fuel bills.” While $80/bbl is a “good price for oil producers,” Jakob said, “warning signs are starting to appear that it is not such a good price for oil consumers.” He said, “Therefore, we will remain cautious in joining the club calling for $95/bbl crude oil on a sustainable basis for 2010 as we think that the demand side of the equation will still be too fragile at such level of prices.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “While bias is still to the upside, crude will likely meet further technical resistance at $82.50/bbl if it keeps trending up.”

Natural gas
Natural gas prices fell 2.9% on Feb. 22 in New York, “ending below the vaunted $5/Mcf, its lowest close since Dec. 4,” said Raymond James analysts. “Natural gas’ third consecutive session of losses came as forecasts for colder-than-normal weather at the beginning of March were replaced by forecasts for normal temperatures.” Both crude and gas were down in early trading Feb. 23.

Traders are worried about warmer weather in the last weeks of winter gas withdrawal season and about increased drilling activity adding to already elevated gas storage inventories.

Pritchard Capital Partners said, “We believe that despite one of the strongest heating load season on record, the market will continue to have bearish sentiments for natural gas in 2010, as supplies have held firm, meeting the demand adequately, owing to the structural shift in natural gas supply dynamics as a result of ongoing drilling and completion efficiencies in North American natural gas shale plays. Furthermore, we believe reversal of coal-to-gas fuel switching and demand associated with it, combined with the availability of new LNG supplies, will dampen any sharp appreciation in natural gas prices.”

Energy prices
The March contract for benchmark US light, sweet crudes continued climbing, up 35¢ to $80.16/bbl Feb. 22 on the New York Mercantile Exchange. The April contract increased 25¢ to $80.31/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 35¢ to $80.16/bbl. Heating oil for March delivery inched up 0.89¢ to $2.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 3.01¢ to $2.12/gal.

The March natural gas contract dropped 14.9¢ to $4.90/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 17¢ to $4.92/MMbtu.

In London, the April IPE contract for North Sea Brent crude increased 42¢ to $78.61/bbl. Gas oil for March gained $6.25 to $637.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes escalated 97¢ to $76.14/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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