RAN Energy Weekly Outlook

After selling off on Tuesday after a Goldman Sachs research note advising clients to take profits in crude futures, energy futures recovered to finish higher on the week. WTI gained 4.4% to settle at a new record of $95.93 a barrel on Friday, while heating oil futures likewise ended at a record $2.5737 a gallon. The main catalysts for the upward price action were a weakening dollar following the Fed’s ¼ pt rate cut on Wednesday, a second consecutive large draw in U.S. crude inventories (e.g. 3.9M barrels), further comments by OPEC against another output hike and renewed geopolitical concerns about Iran following a Daily Telegraph article on Friday saying that the U.K.’s Defence Ministry will deploy a Royal Navy aircraft carrier in the Gulf of Iran next year. Market attention this week is likely to remain on U.S. petroleum supplies as wintry like temperatures are expected by one private forecaster to move into the Northeast. Traders will also be looking out for any changes in OPEC’s stance on output ahead of the Riyadh Summit and on the EIA’s latest Short-Term Energy Outlook (STEO), which is due out on Tuesday.

Regarding the STEO, the EIA told Ransquawk last Thursday that the Administration is likely to raise its price forecasts for WTI crude futures from $68.84 per barrel for 2007 and $73.50 per barrel in 2008, given where current prices are. The analyst we spoke to would not say whether the EIA would cut its forecast for U.S. oil demand, but did acknowledge that U.S. petroleum products demand last week of 20.41M b/d was below the EIA’s view for 2007 of 20.8M b/d. He also said that last week’s decline in crude inventories is explained by the state of backwardation in the futures market, where no one wants to hold inventory at a time when product refining margins are poor. Lastly, the analyst echoed concerns expressed early last week by EIA Director, Caruso, about the effect of a cold winter - particularly in the Northeast - on tight U.S. supplies.