Oil and Gas Prices

[dan_s]

IMO today is the 3rd and final test of support for oil at $88/bbl. If this strong support level holds then traders will take crude oil higher starting next week. Today is triple witching day (options expiration) so things settle down next week and traders will be looking at the strong 4th quarter reports coming from the E&P sector. - Dan

January 20: Commodities Discussion
Crude Oil – Up $1.20, or 1.35%, to $90.06/bbl after the contract for February delivery fell $2.00, or 2.2%, to settle at $88.86/bbl yesterday, finally giving way to the bearish pressures on concerns that China will have to aggressively tighten its monetary policy at the cost of GDP growth to counter inflation. Chinese growth climbed to 9.8% in the fourth quarter vs. consensus of 9.4% growth indicating that the economy remains super-charged despite the recent tightening of money supply in the country. Although inflation eased a little in December to a 4.6% rate, it is expected to be a temporary relief. To bring inflation down to targeted 4% level, China will need to move more aggressively to restrict money supply. Additionally, an unexpected build in crude stockpiles also kept crude prices under pressure. Crude inventories gained 2.62 MMbbl in the week ending January 14, while consensus was that the stockpiles would drop by 0.5 MMbbl. However on a positive note, existing home sales in the U.S. increased 12% in December to 5.28 million vs. consensus of 4.87 million annual rate; and the leading indicators were also better than economists’ expectations, signaling that the recovery is gaining ground in the U.S. and this may keep the bears in check.

Natural Gas – Up 3 cents, or 0.70%, to $4.73/MMbtu after the contract for February delivery climbed 13.6 cents, or 2.9%, to settle at $4.70 yesterday on larger than expected storage withdrawal. The EIA reported a withdrawal of 243 Bcf which was above both the consensus of 233 Bcf and our estimated range of 220-230 Bcf. Almost all of the variance to our estimate came from the producing region, which reported larger than expected withdrawal, probably not only due to the inefficient heating of the larger homes in the South, but also due to the potential issues with winterization of wells in the producing region. Storage now stands at 2,716 Bcf, which is only 1.9% above the five-year average. The storage withdrawal this week has reduced the surplus to the five-year year average to 51 Bcf from 161, but has widened the year-over-year surplus to 74 Bcf from 69 Bcf. Boosted by short covering, prices gained more than 6% in the past two days. The flattening supply, improving economy, greater utility demand, and the weather support may even be able to push the average prices north of our $5.00 estimate for 2011.