by Patti Domm:
Oil prices are down more than 10 percent since OPEC took no action Friday, and El Nino weather patterns are adding to the pain, creating a double whammy for the energy complex.
West Texas Intermediate oil futures were down nearly 2 percent in early trading Tuesday, after losing about 6 percent Monday. Natural gas futures were lower again Tuesday after both natural gas and heating oil futures plunged about 5 percent as warm weather looks set to extend into late December, prime heating season. Energy commodities are now trading near 2009 lows.
The Organization of Petroleum Exporting Countries announced on Friday an increase in output to the level it was already producing, not a cut in production as some in the market were hoping for. That sent oil prices sharply lower and the selling continued Monday, with the stocks of energy companies also taking a beating.
"The biggest ticket item is OPEC but weather makes a difference. The weather, of course, is impacting heating oil-distillates and diesel, but this is an area that's already been very weak during the whole economic re-configuring in China," said Eric Lee, Citigroup energy analyst.
WTI broke through its March low of $37.75 per barrel Monday, with traders saying its next target looks lower to around $32, the low from the thick of the financial crisis.WTI futures were trading just under $37 per barrel Tuesday.
Natural gas for January delivery settled down 5.4 percent Monday at $2.067 per million British thermal units on the New York Mercantile Exchange. Heating oil, at about $1.27 per gallon, has fallen from a peak of $1.60 in early November.
"Everybody's looking at crude in storage tanks, but diesel in storage tanks is also very high. it's been weak because diesel is associated with emerging markets activity," said Lee.
Diesel is a distillate, as is heating oil, and the softer demand for heating oil in a warmer-than-average Northeast is likely to continue to weaken if December remains warm. Heating oil is the same fuel as ultra-low sulfur diesel.
And from all signs, December is expected to remain warm and could be record warm.
"The crude oil glut gets all the attention, but the global glut of refined fuels is probably more remarkable," said John Kilduff, analyst with Again Capital. Kilduff said there's more concern about a shortage of space to store diesel than oil, and if the market runs low on storage, there's more chance it will be sold at fire-sale prices in the market place.
"The next 10 days are supposed to be really mild," said Gene McGillian, an analyst with Tradition Energy. He said that weather together with the more than 4 trillion cubic feet of natural gas in storage is a recipe for lower gas prices.
As for heating oil, McGillian said refinery utilization crept back up to 95 percent so refineries continue to drive diesel and other products into already crowded markets.
"A lot of the weather guidance continued over the weekend and it showed we are probably going to move through December with record warmth," said Jacob Meisel, chief meteorologist at Bespoke Weather Services. "This next week looks like it will be the warmest. We definitely will be touching record warms across major population centers in the Midwest and Northeast. These are some of the biggest demand regions for natural gas."
Temperatures next weekend are expected to reach as high as the 50s and 60s in some parts of the Northeast. The third week of December also looks warm but the warm mass gets bigger and spreads in the final week of the month, according to Meisel.
The question is whether January and February turn cold enough to make up for some of the slack demand so far during this winter heating season.
Meisel said El Nino is showing some signs that it could have peaked in November, and that the weather would switch back to normal cold temperatures in late January.
"Once that happens, likely sometime in the middle of January to late January, we'll see that colder flip and that gives the potential for a colder than average February," he said.
But there's some skepticism about that forecast "because the El Nino has not exactly tracked against a number of our models so far. It remains very possible that it remains strong enough to dominate the weather pattern," he said.
So the question is whether the weather turns cold, and if so does it turn cold enough to eat away at some of the high stockpiles of winter fuel.
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