Crude prices hit new low for the year

Nov. 17, 2006
The December contract for benchmark US light, sweet crudes plunged to $56.26/bbl, the lowest close for a front-month contract since Nov. 18, 2005.

Sam Fletcher
Senior Writer

The December contract for benchmark US light, sweet crudes plunged to $56.26/bbl, the lowest close for a front-month contract since Nov. 18, 2005, on the New York Mercantile Exchange after the Energy Information Administration reported the injection of 5 bcf of gas into US underground storage during the week ended Nov. 10.

That injection figure was at the low end of consensus expectations among Wall Street analysts. It compared with a withdrawal of 7 bcf the previous week and the injection of 51 bcf during the same period in 2005. US gas storage was then at 3.45 tcf, up by 176 bcf from year-ago levels and 238 bcf above the 5-year average.

It also was the first increase in US winter gas supplies in 3 weeks, ending a 3-week rally on the natural gas futures market that had boosted the December gas contract to $8.12/MMbtu Nov. 15 on NYMEX. That contract traded at $7.70-8.24/MMbtu on Nov. 16 before closing at $7.76/MMbtu. "On the natural gas front, prices have held within a 98¢/Mcfe range during [most of] November (with a high of $8.26/MMbtu), after months of intense volatility. Frigid weather is the most likely catalyst needed for oil and gas prices to break out of their respective trading ranges," said analysts in the Houston office of Raymond James & Associates Inc. earlier that week.

On Nov. 17 Raymond James said, "A spell of forecasts—mild weather, slowing economy, higher fuel inventories, etc.—prompted a wide sell-off as traders switched over to the January [crude] contract," with the December contract to expire at the end of trading Nov. 17.

The December crude contract had rebounded by 48¢ to $58.76/bbl Nov. 15 after falling for three consecutive trading sessions on NYMEX. That increase was sparked by an EIA report that commercial inventories of US crude rose by 1.3 million bbl to 336 million bbl during the week ended Nov. 10. US gasoline stocks, however, fell 3.7 million bbl to 200.3 million bbl during the same period to the lower half of the average range. Distillate fuel inventories dropped 3.6 million bbl to 135 million bbl, with a slight increase in heating oil buried by a large decline in diesel fuel. The US market had watched distillate inventories drop during the previous 2 months, Raymond James reported.

"The administration reported a large decline in total refined product inventories, driven by strong consumption and reduced supplies. Over the past 4 weeks, total refined product demand has been, on average, 4.5% above comparable year-ago levels. Total refined product inventories, adjusted for demand, are now only 1% above the historical 3-year average," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va., in a Nov. 15 report.

"US inventories have been falling like a stone relative to their normal patterns," said Paul Horsnell at Barclays Capital Inc., London. "The latest US data have continued the very strong pattern of previous weeks, producing the fastest rate of decline relative to normal patterns in any 5-week period that we can find," Horsnell said. "US oil product inventories, (excluding the 'other oils' category, which is estimated rather than observed), now stand 17.3 million bbl higher than their 5-year average. Five weeks ago, they stood 56.8 million bbl higher, i.e., they have fallen by 39.5 million bbl relative to the 5-year average, which is a rate of descent of more than 1.3 million b/d. In terms of forward cover, product inventories are now lower than their 5-year average."

Seasonal effects
Analysts at Enerfax Daily noted that temperatures were above average across most of the US during the week ended Nov. 10, reducing demand and allowing utilities to add gas to storage that already was at a record high. The Nov. 23 US Thanksgiving holiday was expected to cut demand even further with offices and businesses closed.

However, energy prices had climbed Nov. 15 partially in anticipation of Thanksgiving holiday travel. "More people travel over the Thanksgiving holiday than any other holiday in the US. The American Automobile Association, the nation's largest motoring organization, expects 31.7 million travelers to hit the road. That number of motorists is about 83% of the total number of travelers expected over the Nov. 23-26 period," said Raymond James analysts.

Meanwhile, the Organization of Petroleum Exporting Countries warned in its latest monthly oil market report that, if it continues producing at current levels, there would be a bigger than usual build in oil inventories among consumer nations in the second quarter of 2007.

(Online Nov. 17, 2006; author's e-mail: [email protected])