MARKET WATCH: Mild weather drops gas prices; oil strengthens

Oil prices strengthened Jan. 17 following an upbeat report on the German economy and better-than-expected data from China, but front-month natural gas plunged 7% in the New York market with milder-than-normal winter weather.

Moreover, said analysts at Pritchard Capital Partners LLC, “Natural gas plunged 13% last week on the New York Mercantile Exchange, the biggest decline in almost 2½ years, after forecasts showed above-average temperatures through January. Stockpiles in the week ended Jan. 6 stood at 3.377 tcf, 17% above the 5-year average…. Driven by rising output from horizontal drilling in shale formations, US gas production will average an all-time high of 67.34 bcfd in 2012, up 2.2% from 2011, the Energy Information Administration said in its Jan. 10 Short-Term Energy Outlook. In the short term, as weather patterns remain unfavorable to consumption, the current downtrend in natural gas prices will likely find a bottom as utilities increasingly prefer gas over coal for power generation. We believe there is considerable potential switching capacity yet available; however, the decision to switch fuels is multivariate and proprietary.”

Meanwhile, Pritchard Capital Partners lowered its 2012 gas price forecast to $3.30/MMbtu from $4.40/MMbtu and its 2013 outlook to $4/MMbtu from $5/MMbtu, with no change in its expectation of $5/MMbtu for 2015 and beyond. However, the firm raised its 2012 price forecast for West Texas Intermediate to $98.45/bbl from $89.30/bbl—“a 10% increase based on the assumption that continued geopolitical risk, particularly in the Middle East and North Africa, and demand growth in the non-OECD markets, particularly in China, will support prices,” analysts said. They raised their 2013 outlook for WTI to $95/bbl from $91.50/bbl. They said, “Historically around this time of year, E&P companies are finalizing annual capital expenditure budgets. Based on the current commodity price environment, we believe operators will be directing the majority of resources towards liquids-rich plays.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “US natural gas is falling and falling and falling. The lack of winter in the US is surely not helping, and gas futures are approaching the lows of 2009 while open interest continues day after day to print new record high levels. We are not sure what could trigger some short-covering, hence with the surge of open interest we have to consider that gas can be pushed even lower.”

Jakob noted “for a long time” gas prices have “gone the opposite way” from oil prices on a $/MMbtu basis. “Hence, what oil-to-gas substitution there can be should have already been maxed out. However, gas is starting to be priced below coal, and we are not sure when was the last time we had such economics, if ever. UK natural gas is not doing as bad as US natural gas, but it is also on a declining trend given that the winter in Europe has not been particularly strong either. This in turn could start to put some additional pressure on coal prices in the Atlantic Basin, in heating oil, and in naphtha as natural gas will be the preferred feedstock.” If petrochemical companies start to switch more aggressively back to propane, the naphtha crack will again come under pressure, which in turn will put pressure on the gasoline crack, he said.

“The refining margins have been supported by the distillate crack rather than the gasoline crack, and the gas oil cracks are under pressure. The ICE gas oil February-March time-spread is moving to a small contango, and that is a big change from the $9/tonne backwardation of 2 months ago,” said Jakob. “If the refining margins start to fall due to a weaker structure in gas oil then it will not be so good for the light, sweet crude oil market in the Atlantic Basin, a market that is trying to digest the return of Libya closer to full prewar output.”

He said, “On a fundamental basis there is not anymore much that supports the idea of Brent having to be at a $12/bbl premium to WTI while on a time-spread rolling basis Brent should command only a $3/bbl premium to WTI. Given the price input of relative values both on an intra and inter basis, if it was not for the proposed embargo on Iran, the outright price of crude oil would be at a much lower levels.”

A positive report on the German economy by the Zentrum fur Europaische Wirtschaftsforschung (ZEW: the Centre for European Economic Research in Germany) helped boost both the euro and oil prices Jan. 17. Another supportive factor was an earlier statement by Saudi Oil Minister Ali Al-Naimi that the kingdom wants to keep oil at $100/bbl, substantially above the $75/bbl level indicated by the Saudis as a fair price in 2008.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The raised expectation by Saudi Arabia was not surprising after a jump in public spending amid the unrest in the Middle East and North Africa region last year. In fact, the International Monetary Fund estimated that Saudi needs at least $80/bbl to balance its budget, while Iran, Iraq, and the UAE need an oil price somewhere between $80-100/bbl.”

Energy prices

The February contract for benchmark US light, sweet crudes traded at $98.60-103.12/bbl Jan. 17 on NYMEX before closing at $100.71/bbl, up $2.01 for the day. The March contract increased $1.99 to $100.87/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.01 to $100.71/bbl.

Heating oil for February gained 1¢ to $3.04/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 3.71¢ to $2.77/gal.

The February natural gas contract dropped 18.2¢ to $2.49/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 19.2¢ to $2.47/MMbtu.

In London, the new front-month March IPE contract for North Sea Brent climbed 19¢ to $111.53/bbl. Gas oil for February lost $6 to $952.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 75¢ to $112.24/bbl.

Contact Sam Fletcher at [email protected].