Re: Looks like the cold spell coming in now may put a stop to the falling oil price.
CN_Today 1/19/2007 8:39:00 AM
ENERGY MATTERS: Despite Cold, Crude Dips Under $50/Bbl
NEW YORK (Dow Jones)--Just before the season’s first noticeable snowflakes fell outside the New York Mercantile Exchange on Thursday, crude oil futures fell just below $50 a barrel, to a fresh 20-month low.
The chance to get a dime in change back from forking over a $50 bill for a barrel of oil hung in the air about as briefly as the snow swirl.
But both events stand as potential turning points for the near-term market, though there’s serious risk of putting too much emphasis on either.
The appearance of snow in New York City - though not enough to form even a snowball - came as federal meteorologists offered a chillier forecast for February, with near-normal temperatures now deemed just as likely as the previously predicted above-normal conditions.
Still, a colder turn in the weather is unlikely to dent heating oil inventories in the U.S. Northeast, which continue at their highest levels in eight years and are 33% to 43% higher than their five-year averages in the Mid-Atlantic and New England states, respectively. The two areas combine to make the world’s largest heating oil market.
Demand for distillate fuel, the umbrella group for diesel fuel and home-heating oil, has averaged under 4 million barrels a day so far in January, federal data released Thursday show. That’s the weakest start to the year for distillate demand since 2004 and is 10.7% below expectations from the federal Energy Information Administration.
The National Weather Service said December in New York City passed without a snow flurry for the first time since 1877.
Back then, coal was king and Rutherford B. Hayes was the nation’s president, having succeeded Ulysses S. Grant. The same Grant now graces the same $50 bill that can now buy a 42-gallon of crude oil.
Super-Spike? Now 2 Barrels For $100
In March 2005, when crude was in the mid-$50 range, the buzz was all about the Benjamins, with Goldman Sachs asserting that the market had entered a super-spike period, with prices heading to $105 a barrel - or a $100 bill bearing the likeness of Benjamin Franklin along with a $5 picture of Abraham Lincoln.
Prices hit as high as $78.40 in mid-July 2006 - before plunging 36% to today’s levels, where a Benjamin buys two barrels of crude.
A $50 bill will also bring change back to the drivers who fill up 22-gallon tanks in their SUVs in some cities, with gasoline heading toward $2 a gallon. It hasn’t been there on a nationwide basis since March 2005, after hitting $3 a gallon last August.
Demand for gasoline in the week ended Jan. 12 was the lowest since mid-April 2006, but so far this month, at 9.13 million barrels a day, is on a record pace for January and 2.6% ahead of forecasts.
The relative weakness of heating oil and strength of gasoline in winter is but one of a few quirks of the current oil market.
The International Energy Agency, the energy security watchdog of the major industrialized countries that make up the Organization for Economic Cooperation and Development, gave mixed reviews in a report Thursday to OPEC’s efforts to rein in output and put a floor under prices.
Members of the Organization of Petroleum Exporting Countries had managed to prop up tumbling crude oil prices by about 6% through the end of 2006 after announcing two tranches of oil output cuts, totaling 1.7 million barrels a day.
But prices have fallen sharply since the start of the year, well before the Feb. 1 start date of OPEC’s second pledged cut of 500,000 barrels a day.
Unseasonably warm weather and heavy selling from commodity funds and other speculative players has brought oil prices down 12.9% on average so far this month from the December average. After dipping to $49.90 a barrel, Nymex-front month crude oil futures for February delivery settled at $50.48, the lowest since May 24, 2005. The contract could face strong pressure to settle below $50 before its expiration at Monday’s settlement.
Concern Over Spare, Not Sparse OPEC Oil
IEA said OPEC has cut output, but not by the levels promised. December production from the 10 members that are party to the agreement was 27 million barrels day, or 700,000 barrels a day above the pledged level.
But, perversely, even OPEC’s modest output cuts - meant to strengthen the market - may be a further threat to prices.
The surge in oil prices over the past years was helped in part by concerns of razor-thin OPEC production capacity - sparse barrels, not spare barrels. Now, with the group’s effective spare capacity of about 2.5 million barrels a day, that extra oil stands as a threat to come on the market - depressing prices further - especially if some members decide to pump more to offset the effects of the price fall.
“Ironically, the restart of output restraint by OPEC offers proof to the consumers that there is marketable spare capacity in the system and thus exerts a downward pressure on prices,“ the IEA said in its monthly Oil Market Report.
The downtrend might not last, IEA said, if the trend of declining inventories props up prices.
Saudi Arabian Oil Minister Ali Naimi, the de facto OPEC leader, shook off the price fall as a transient market factor and stressed that OPEC’s supply restraint moves are tightening the market.
U.S. crude stocks jumped 6.8 million barrels in the latest week in the biggest barrel-for-barrel weekly gain since Oct. 11, 2002. The gain followed seven weeks of declines which slashed crude inventories by 26.4 million barrels or, or 7.8%, since mid-November.
U.S. refiners, as expected, have gone into a period of heavy maintenance shutdowns, trimming crude oil processing by 3.2%, or more than 500,000 barrels a day in the latest week, to 15.1 million barrels a day. While that’s the lowest level since the end of September, EIA projects still steeper cutbacks, as full-month January crude runs are expected to average below 14.8 million barrels a day.
It’s clear that it’s too late for the weather to bail out the market now, and if OPEC doesn’t tighten up on quota compliance, oil traders may soon be getting more than 10 cents in change back when handing over $50 for a barrel of crude.
Source: David Bird, Dow Jones Newswires 201-938-4423 david.bird@dowjones.com
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