Crude suffers severe 2-day loss

Jan. 8, 2007
The February contract price for benchmark US crude fell 9% Jan. 3-4 to near 18-month lows in the first two trading sessions of 2007 on the New York Mercantile Exchange.

Sam Fletcher
Senior Writer

The February contract price for benchmark US crude fell 9% Jan. 3-4 to near 18-month lows in the first two trading sessions of 2007 on the New York Mercantile Exchange.

The front-month contract dropped a total of $5.46 over those 2 days to close at $55.59/bbl on Jan. 4. "We have to go back to early December 2004 to find a 2-day loss that was greater than the loss of this week," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. The market was closed Jan. 1 for the New Year's holiday and Jan. 2 for the funeral of former US President Gerald Ford.

"El Niño is taking a toll on the energy complex as it brings a warm Northern Hemisphere winter. We believe this fact has already been reflected in natural gas markets and is now showing up in oil," said Adam Sieminski of Deutsche Bank AG, New York. "Although the oil price could have further downside, we believe the drop so far combined with dollar weakness will prompt the Organization of Petroleum Exporting Countries into further action to defend the oil price, which, in an environment of still robust world growth, we believe will eventually push the oil price back up above $60/bbl in 2007."

Adjusted for the euro's increased value against the US dollar, a $55/bbl price for benchmark US crude becomes the equivalent of just $42/bbl for that crude and $38/bbl for the OPEC basket. That fact is "not lost on the OPEC ministers" who paid for their oil in dollars while trading with Europe in euros, Sieminski noted.

Estimates adjusted
The US Energy Information Administration lowered its estimate of US crude demand by 567,000 b/d to 20.8 million b/d in October; its preliminary estimate of 21.3 million b/d would have represented a 5.3% gain from a year earlier to the highest level ever recorded for October. But even if the US economy slows in 2007, rising economic activity in Europe and Asia may easily offset the lost US demand, said analysts in the Houston office of Raymond James & Associates Inc.

"Finally, the real and existing threat of geopolitical wildcards such as Iran, Iraq, Nigeria, and Venezuela continue to hang over the oil markets, and they most likely won't disappear anytime soon," Raymond James analysts said. "Clearly, there are more fundamental and concrete reasons to support the bulls over the bears."

Nonetheless, Raymond James lowered its 2007 oil price forecast to $67/bbl from $70/bbl previously and its natural gas price estimate for the new year to $7.50/Mcf from $10/Mcf. "We still expect oil prices to firm as we move through 2007," the analysts said. "On the North American gas front, however, our 2007 natural gas outlook has deteriorated substantially from what we were expecting just a few months ago. The change to our outlook is strictly weather-related."

Raymond James analysts said, "We still look for gas prices to ramp up in the second half of the year as gas supplies begin to fall off; however, we now do not foresee gas prices reaching a more normal 7:1 ratio with oil prices until 2008."

As for 2006 price estimates, Raymond James analysts said, "For the first time in years, our natural gas forecast of $10.50/Mcf was actually too high. In fact, our estimate was more than 30% higher than the actual full-year average of $7.24. For the fourth year in a row, however, our bullish call on oil still proved too conservative, due in part to escalating concerns about Iran in the first half of the year. Even though our original $58/bbl oil forecast for 2006 was more than $2 (or 4%) ahead of Wall Street consensus at the time, it ended up falling short of the actual average by $7 (or 11%)."

Phil McPherson at C.K. Cooper & Co. in Irvine, Calif., noted that the February natural gas contract ended 2006 at $6.30/MMbtu Dec. 29 on NYMEX. That was "lower than last year's closing price for the first time in 5 years and a 37% decline year-over-year for the sector," he reported. With a glut of gas supplies and continued mild weather across most of the US, the price for natural gas is likely to average a modest $7/Mcf for 2007 and could even touch $5/Mcf this year if warm weather persists, McPherson said. He said the front-month crude futures price on NYMEX could fall as low as $55/bbl by the end of the first quarter of 2007 if a mild winter continues.

(Online Jan. 8, 2007; author's e-mail: [email protected])